Spanish Bonds Break Four-Day Run of Declines Before Fed Meeting

  • Securities recoup about half of losses made since Sept. 8
  • Traders refrain from decisive bets before U.S. rates decision

Spanish bonds rose for the first time in five sessions as investors perceived the declines as excessive and pared positions before a Federal Reserve policy meeting ending Sept. 17.

Benchmark 10-year Spanish government securities recouped about half of their the losses made over the past four days. Uncertainty in the run-up to the Sept. 27 regional election in Catalonia had weighed on Spain’s bonds and driven yields to their highest in almost two months on Sept 8. Investors awaited the Federal Reserve policy meeting where officials will consider raising U.S. interest rates for the first time since 2006.

“Some people thought the selling was overdone and saw this as a time to re-enter,” Spanish bonds, said Lyn Graham-Taylor, a London-based rates strategist at Rabobank International. He added bonds “moved sideways yesterday” and could do so again as the Fed decision draws closer.

Spanish 10-year bond yields fell four basis points, or 0.04 percentage point,  to 2.09 percent at 2:06 p.m. London time. The 2.15 percent security due in October 2025 rose 0.32, or 3.20 euros per 1,000-euro ($1,130) face amount, to 100.565.

Similar-maturity Italian bond yields were little changed at 1.86 percent. The yield on 10-year German bonds rose five basis points to 0.70 percent.

Italy-Spain 10-Year Yield Spread
Italy-Spain 10-Year Yield Spread

The extra yield, or spread, that investors get for holding Spanish bonds instead of Italian ones, fell to 23 basis points, after widening Sept. 11 to almost 28 basis points, the most since August 2013.

The spread could widen again as the Catalan elections draw closer, according to Vincent Chaigneau, the global head of rates and foreign-exchange strategy at Societe Generale.

Fed Decision

Moves today were probably “a bit of position-squaring ahead of the Fed,” Societe Generale’s Chaigneau said. “The under-performance of Spain versus Italy this summer is definitely a topic that investors discuss,” he said, adding that it would be “hard to fade that however, into the Catalonian election.”

Investors remain divided on what the U.S. central bank’s next move would be. About half of economists surveyed by Bloomberg predict the Fed will move Sept. 17 even as investors cut wagers of that happening to 30 percent from more than 50 percent before China’s currency devaluation in August.

“For now, we are going to be in a wait-and-see mode,” said Orlando Green, a fixed-income analyst at Credit Agricole SA’s corporate and investment-banking unit in London. “Until we get the news from the Fed on whether they will hike or not” investors would “not move too much” he said.

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