Peripheral bank bond penalty vanishing as confidence returns

By Alastair Marsh

The penalty that banks in Europe’s most indebted nations pay to borrow compared with those from the richest economies fell to the lowest in four years amid growing confidence in the region’s economic recovery.

Lenders from Italy to Greece now pay 0.38 percentage points more yield than borrowers from core nations including France and Germany, down from a high of 4.38 percent reached in November 2011, according to Bank of America Merrill Lynch index data. The average yield on bonds issued by peripheral banks fell 56 basis points this quarter to a record 2.17 percent, the data show.

Bonds shunned by investors during Europe’s debt crisis returned to favor amid optimism Italy is emerging from recession and after Spain was upgraded by Moody’s Investors Service. A selloff in emerging market assets and the crisis in Ukraine failed to damp demand for peripheral debt, which was buoyed by European Central Bank President Mario Draghi’s pledge to keep interest rates low well into the economic recovery.

“Peripheral banks were paying substantial yields but they have been decreasing over the last months as investor sentiment has improved, with the recent upgrade of Spain a significant catalyst,” said Cristina Martinez, who helps oversee about 6 billion euros in fixed income at Ibercaja Gestion SGIIC SA in Zaragoza, Spain. “Also, the periphery is isolated from much of the trouble in eastern Europe while some core banks are not.”

Peripheral bank bonds are among the best performing corporate securities in Europe, returning 3.24 percent this quarter, according to Bank of America Merrill Lynch index data. That compares with 2.11 percent for notes issued by lenders in the region’s core and 2.25 for all financial debt in euros.

Intesa Sanpaolo SpA (ISP), Italy’s second-biggest bank, handed investors the best returns among financial investment-grade notes in euros, with the Milan-based lender’s 6.625 percent bonds due September 2023 returning 8.58 percent, according to Bloomberg bond index data. [Bloomberg]