| Value has recently returned to Spanish bonds, the result of a disinflation policy which has begun to bear fruit and a European-wide convergence process which is making rapid advances as the all-important date of January 1, 1999 approaches. Spanish yields may fall to as low as 8% to 8.25% at 10 years as a result of this process in 1996, representing a narrowing of the yield spread over Germany towards 200bp this year and 150bp next. What is important is that this conclusion is not dependent on the limiting assumption of Spain joining Emu as early as 1999. EMU in 1999 Looks Ambitious for Spain Spain will most likely be excluded from the first round of Emu. Its public deficit is still some way from the 3% of GDP target and, perhaps more of a problem in Spain's case, its public debt is not only above 60% of GDP (65.1% currently, see chart 2), but is still rising. Even inflation, at 3.4% vastly improved from the 5.2% registered 12 months ago, nonetheless would still leave Spain outside of Emu on inflation grounds. But in terms of finding value in Spanish fixed-income securities, this is probably of little importance. |