Spanish Bonds Fall as Rajoy Election Victory Damps Bailout Bets

Spanish bonds fell for a second day on speculation Prime Minister Mariano Rajoy’s regional election victory gives him more room to delay seeking a bailout that would allow Europe’s central bank to buy the nation’s debt.

Spain’s 10-year yields climbed the most in a week after a report showed mortgage lending declined for a second month in August and after Chancellor Angela Merkel rebuffed a French-led bid to set up a joint European treasury. Italian 10-year bonds rose as an official said the Treasury will reduce the amount of short-term debt auctioned this year after a record sale of retail bonds last week. German bonds declined.

“The market realizes that Rajoy’s victory is insufficient to bring an aid request much closer,” said Elwin de Groot, a senior market economist at Rabobank Nederland in Utrecht. “Also we had pretty awful mortgage data this morning. That is not helpful either.”

Spain’s 10-year yield rose 11 basis points, or 0.11 percentage point, to 5.48 percent at 4:03 p.m. London time, the biggest increase since Oct. 15. The 5.85 percent bond due in January 2022 fell 0.815, or 8.15 euros per 1,000-euro face amount, to 102.575.

Rajoy’s People’s Party extended its majority in the premier’s northwestern home region of Galicia, taking 41 of 75 seats as the Socialists lost almost half of their votes. The region was one of the first to implement an austerity program and had one of the smallest deficits last year.

Breathing Space

The victory gives Rajoy breathing space to refrain from seeking European aid as he struggles to put his debt-laden nation’s finances on a surer footing. A bailout request would put into practice new European Central Bank tools for ending the region’s fiscal crisis, which allow it to buy sovereign debt to damp ailing euro members’ rising borrowing costs.

The number of Spanish home loans fell 28.5 percent from a year earlier, according to data published by the national statistics institute INE.

Spain’s two-year yield climbed 14 basis points to 2.88 percent after falling to 2.66 percent on Oct. 19, the lowest level since April (APR) 4.

Chancellor Merkel blunted French President Francois Hollande’s appeal for more transfer payments from rich to poor countries along with common euro-area bond sales to ease the region’s debt crisis.

“As long as there are individual national budgets, I regard the assumption of joint liability as inappropriate and from our point of view this isn’t up for debate,” Merkel told reporters two days ago.

Italian Bonds

Italian bonds rose after an official said the debt agency will “revise and recalibrate the issuances in light of the retail sale’s success.” The sale attracted bids for 18 billion euros, double the two previous offers combined.

The debt agency’s review aims “in particular at reducing the amount of short-term issuances,” said the official, who declined to be identified.

The yield on Italian 10-year bonds dropped one basis point to 4.76 percent.

The German 10-year bund yield rose three basis points to 1.62 percent after climbing 15 basis points last week.

Volatility on German bonds was the highest in euro-area markets today, followed by those of Finland and Portugal, according to measures of 10-year or equivalent-maturity debt, the spread between two- and 10-year securities, and credit- default swaps.

Germany’s bonds returned 2.5 percent this year through Oct. 19, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities rose 3.9 percent, and Italian debt gained 18 percent.

To contact the reporters on this story: David Goodman in London at dgoodman28@bloomberg.net; Lucy Meakin in London at lmeakin1@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net

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