(Bloomberg) -- Already one of the year’s most popular bond-market trades, Spain could get another boost if Moody’s Ratings upgrades its credit score later Friday.
The market is split on whether the firm will make such a move just six months after putting it on a so-called positive watch. While strategists at Societe Generale SA and Natixis say it’s too soon, Danske Bank and Zurich Insurance Co. see a chance of an upgrade to A3 — its fourth-lowest investment grade — from Baa1.
“The fact that gross domestic product growth data continues to come in considerably above market expectations may be a catalyst for an upgrade,” said Zurich’s chief market strategist Guy Miller. Moody’s has said that evidence of more persistent growth could warrant an improved rating.
Record tourist numbers, strong exports and a rapidly expanding population mean Spain has one of the highest growth rates in Europe despite the country’s fragmented government.
The nation’s appeal contrasts sharply with French debt, which has underperformed this year after a snap election destabilized the political landscape and stoked fears about how a new government will manage the nation’s large deficit.
Though France is ranked five rungs higher than Spain at Moody’s, the gap between their 10-year yields has narrowed to just 10 basis points, compared with about 60 basis points a year ago.
Extra Return
Investors have also snapped up the nation’s bonds to take advantage of the extra return they offer when compared with Germany, the region’s safest asset. Spanish 10-year bonds still pay about 80 basis points of additional yield over Germany, compared with about 110 basis points a year ago.
As well as the Moody’s decision, S&P Global is also due to review Spain on Friday and could decide to change its outlook on the country from stable to positive. It has an outstanding rating of A, two notches higher than Moody’s.
Zurich’s Miller is less optimistic about S&P, pointing out that the firm has already said Spain needs to make more progress improving its debt-to-GDP ratio. While that metric has fallen sharply from 125% in early 2021, it’s flat-lined at around 110% since the end of 2022.
Even if Moody’s and S&P stand pat on Friday, they’re unlikely to sour the positive sentiment toward Spain that’s built through this year.
Spain’s 10-year yield now sits just below 3%, down from about 3.25% at the time of Moody’s last assessment in March. The European Central Bank delivered its latest interest-rate reduction on Thursday.
“Debt affordability seems to have improved notably for Spain,” Citigroup strategist Aman Bansal wrote in a note this week. “This perhaps also warrants more than one-notch upgrades from Moody’s, and potentially a positive outlook from Fitch/S&P, over coming quarters.”
This story was produced with the assistance of Bloomberg Automation.
--With assistance from Zoe Schneeweiss.
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