Spanish Bond Yields Signal Calm Before Elections in Four Days

  • Yield spread to Italian securities narrows before Dec. 20 vote
  • Campaign polls signal possible PP coalition with Ciudadanos

Jitters that investors may feel just four days before national elections in Spain are absent from the government-bond market.

Spain’s sovereign securities held a two-day gain, tracking movements in their Italian counterparts for a third day. In the past month leading up to the Dec. 20 vote, the extra yield investors demanded to hold Spanish 10-year debt compared with similar-maturity Italian bonds has narrowed -- indicating relative calm.

In Spain, where the economy is growing at close to pre-crisis levels, the two traditional parties that have led governments in the last three decades face their strongest challenge yet from two newer formations. Surveys point to a possible coalition between the ruling People’s Party and newcomers Ciudadanos, who are frequently described as centrists.

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

“If you look at 10-year yield spreads, Spain-Italy have compressed,” said Martin van Vliet, senior interest-rate strategist at ING Groep NV in Amsterdam. “I think the markets are moving to an outcome where you might see a PP-Ciudadanos majority, which is quite a stable government.”

Yield Gap

Yields on Spain’s 10-year government bonds were little changed at 1.77 percent as of 4:06 p.m. in London. That’s seven basis points, or 0.07 percentage point, more than similar-maturity Italian debt. The gap was as wide as 23 basis points in mid-November, based on closing prices. The yield difference had shrunk to five basis points on Dec. 8, the narrowest since July.

ING’s van Vliet said the spread could “inch back to the five basis-point level we saw last week, which is a big compression from the around 20 basis points” in November.

Spanish sovereign bonds returned 1.5 percent this year through Tuesday, while Italy’s earned 4.3 percent and holders of Portuguese securities received 3.3 percent, according to Bloomberg World Bond Indexes.

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