Investor Bets $1.2 Billion in Spain Bonds on Return of Inflation

(Bloomberg) -- A single investor has placed a long-term $1.2 billion bet in Spain on the return of inflation.

The buyer purchased three inflation-linked bonds specially issued this week with maturities as far out as 2050 in a private placement, according to a Spanish government notice. The debt won’t trade in the secondary market and the buyer, who will remain anonymous, plans to hold it to maturity, a person familiar with the deal said.

Spanish bonds are surging with conventional 10-year yields falling to a record low on Friday, as one key gauge of inflation expectations in the euro area reached an all-time low. However, the Spanish linkers are fixed to the Eurostat Eurozone HICP Ex-Tobacco index, which has risen for three straight months.

The 1 billion-euro ($1.2 billion) deal follows a rally in Spain’s closest-maturity linkers. Spain’s 2033 inflation bond has outperformed its peers in the past month, returning 5.6%, or roughly a 98% annualized yield. The linker market is now “a little squeezed” in price, given relatively small supply through auctions this year, said Jorge Garayo, a strategist at Societe Generale SA in London. 

“There would definitely be demand” for bigger auctions of existing linkers, or a new issue, Garayo said.

Long-term bonds, for which returns are tied to inflation, are typically bought by large insurance companies. VidaCaixa, Spain’s biggest life insurer, was not the buyer, according to a separate person, who also declined to be named as they were not authorized to speak.

The three new bonds, due in 2048, 2049 and 2050, have call provisions respectively in 2033, 2034 and 2035, according to a June 6 government filing. The option for Spain’s Treasury to pay off the bonds early, an uncommon provision in conventional debt, made their pricing difficult, the first person said.

To contact the reporters on this story: James Hirai in London at jhirai3@bloomberg.net;Todd White in Madrid at twhite2@bloomberg.net

To contact the editors responsible for this story: Samuel Potter at spotter33@bloomberg.net, William Shaw, Neil Chatterjee

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