The brief August lull might offer only a temporary respite from the widening trend that has hit Spanish RMBS. Despite sound fundamentals in the Spanish economy, supply pressure, coupled with investor weariness over the subprime debacle unfolding stateside, means spreads might potentially widen further in the short-to-medium term.

Spanish economic growth has been nothing short of stellar. Over the last 10 years, GDP growth has come in at 3.8%, compared with 2% for its neighboring European countries. But the current pattern of economic growth is unsustainable, Fitch Ratings analysts said, and the market is set to undergo a slowdown. Home price data released by the Ministerio de la Vivienda at the end of July showed further slowing in growth across the country. The year-on-year increase in prices across the whole country now stands at 5.8%, which compares with 10.8% a year ago and a peak of 18.5% in 2003. House price declines were recorded for the first time in Madrid, which saw a 0.4% drop over the last quarter - the first dip in six years. "Madrid tends to lead other regions, suggesting that the slowdown will gradually spread to other regional housing markets," Deutsche Bank analysts said.

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