For most of the past year, bond investors have clubbed Italy and Spain together. Both were seen as countries that were in desperate need of reforms. But now Anthony Peters, fixed income strategist at Swissinvest is arguing that the time has come for bond investors to "decouple" Italy from Spain.
"Italy has a class act economy with a basket case government, and Spain has a class act government with a basket case economy," Peters wrote in a note on Thursday.
Italy moved closer to ending a two-month long political deadlock on Wednesday after the country's president invited Enrico Letta to form a grand coalition government, uniting several of the country's major parties. But analysts are waiting to see whether the grand coalition will be strong enough to deliver structural reforms.
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"The one thing that sticks out at the moment is the 10 year Italian bond," Peters argued. "The benchmark [10-year bond] last night wrapped around 4 percent. Not bad for a country which has supplied the most opaque of election results, has shown little in terms of fiscal discipline and which has seen little growth in anything other than political promises."
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At the same time, Spain released gloomy employment statistics on Thursday, with the jobless rate hitting a new record of 27.2 percent, the same level as Greece's unemployment rate.
"The unemployment figures speak for themselves. Italy's unemployment rate is much closer to that of France in the 11 percent area," Peters pointed out. "We are not far away from trading Italy against France rather than against Spain as a key spread."
The Spanish unemployment rate was 9 percent in January 2008 – right before the country's labor-intensive property sector collapsed – and it has been rising ever since then.
Despite that, Spanish 10-year bond yields are currently at just 4.33 percent, highlighting the disconnect between the real economy and financial markets.