LONDON Oct 25 The ECB's bond-buying plan, Madrid's reforms and global monetary easing are luring foreign investors back to Spanish sovereign debt, particularly for short-term paper.
It is a case of searching for yield while knowing that the European Central Bank has your back.
"Spain is my favourite (among non-core euro zone bonds) because we've got all sorts of hedges," said Elke Speidel-Walz, chief investment strategist for Germany at Deutsche Bank Private Wealth Management
"This means the risk return is best in Spain."
Spain's head of Treasury, Inigo Fernandez de Mesa, says the percentage of non-Spanish investors snapping up his country's debt recently could be as high as 80.
"In almost all the auctions more than 50 percent comes from international primary dealers. Sometimes it's 80 percent, sometimes 70 percent, sometimes 50 percent, sometimes 60 percent.... There is a strong interest," he told Reuters in an interview on Wednesday..
Not everyone is on board, of course, and Spain still needs to press ahead with structural reforms to create a long-term climate that normalises bond yields across the curve.
It is also a long way back from the bottom.
Foreign investors' holdings of 5 and 10 year Spanish debt fell to 33.86 percent in the first eight months of the year as fears grew it was heading for bankruptcy like Greece. This compares with 51.5 percent last year and a record 54.7 percent in 2010, Spanish Treasury data shows.
But some big funds have been moving back in, particularly since ECB President Mario Draghi announced his potentially unlimited bond-buying programme in early September.
In a strong sign of a shift of investors' view towards Spain, in the three months to end-September, several funds at BlackRock, the world's largest asset manager, made notable increases in allocations to Spanish government debt, Thomson Reuters Lipper data shows.
"We have been buyers of Spanish government bonds over the last quarter," said Scott Thiel, head of European and global bonds a t BlackRock, whose team manages $100 billion in fixed income assets. Short-term debt was a particular focus.
Thiel said his positive assessment of Spain was based on the government's commitment to reforms, EU rescue plans and low interest rates across the world. But he also stressed that this only applied to a 3-6 month view.
"It will be a multi-year process, it's not going to be fixed next year or the year after," he said.
The BlackRock World Income Fund has increased its portfolio weighting to Spain to 7.1 percent from 3 percent, Lipper data shows, and the BlackRock International Bond Portfolio went to 6.8 percent from 4.5 percent.
The world's biggest bond fund PIMCO also bought Spanish bonds recently, its manager Bill Gross told the Wall Street Journal earlier this month.
For M&G fund manager Jim Leaviss, the improvement in creditworthiness of peripheral euro zone countries, including Spain, is also due to the EU's Nov 1 ban on "naked" positions in credit default swaps -- essentially insurance policies against default.
The ban stops investors from holding CDS without actually needing them for hedging.
"As November approaches, the market is one-way," Leaviss wrote in a note. "There is no longer any willing counterpart to take the short risk positions off the euro zone bears' books."
Not all are convinced by the attractiveness of Spanish debt, though.
UniCredit's asset management arm Pioneer Investments has taken profits recently on its holdings in Spain in most actively-managed fixed-income portfolios, Cosimo Marasciulo, Head of Government Bond and FX said in a note earlier this week.
He pointed at probable delays in bailout talks and other risks including a potentially worsening scenario outside the euro zone.
Others noted that Spain still has work to do to convince investors to buy its bonds across the curve.
The yield spread between 2 and 10-year Spanish bonds has narrowed by 100 basis points since the ECB announced its bond-buying (OMT) programme, but at 250 bps the spread still looks wide compared with others, investors say.
"The problem for Spain is the extent to which they will be able to issue longer-dated paper," said P h ilip Poole, head of global investment strategy at HSBC Asset Management.
"It's about structural reform to increase competitiveness, it's about restoring confidence in the economic model and the drivers of growth. We are still a long way from that."