Spanish Yields Rally as Political Worries Wane

Spain’s 10-year bond yield moved away on Thursday from record lows hit this week, underperforming its regional peers, as ructions in the Socialist Party renewed concerns about political stability in the euro zone’s fourth-biggest economy.

Senior Socialist Party members resigned en masse on Wednesday in a bid to unseat their leader and break a political impasse that has left the nation without a government all year.

News this week that the wealthy region of Catalonia will hold a referendum on independence from Spain next year, whether or not the central government in Madrid agrees to one, also weighed on sentiment towards Spanish bonds, analysts said.

Spain’s 10-year government bond yield rose 3 basis points (bps) to about 0.93 percent and was just over 5 bps above Wednesday’s all-time low at about 0.88 percent.

It underperformed its peers in the euro zone periphery, which drew some support from a recovery in risk assets. Portuguese bond yields fell 4 bps, while Italian yields were about 2 bps higher.

As Spanish bonds came under selling pressure, the yield gap between Italian and Spanish 10-year bonds narrowed to about 28 bps. It had moved out to about 31 bps this week – its widest level since late 2014.

“With Spain being the laggard among the peripherals, it appears that some increased political uncertainty is weighing on the market,” DZ Bank strategist, Christian Lenk, said.

“The removal of support for Socialist leader (Pedro) Sanchez could pave the way for a new leader but it’s far from certain, on the other hand if he steps down that could increase the possibility of the Socialists supporting a government led by Rajoy,” he said, referring to acting Prime Minister Mariano Rajoy.

Reuters

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell