Spanish Markets Calm After Election With Growth Seen Improving

  • Sovereign bonds outperform German peers one day after selloff
  • Equities rebound as politicians begin making contacts

Relative calm returned to Spain’s financial markets after a decline Monday that pushed 10-year government-bond yields to the highest in five weeks, following inconclusive elections that may have put the country’s budget-deficit targets at risk.

With Prime Minister Mariano Rajoy saying he’s begun reaching out to rival political leaders, Spanish 10-year securities outperformed their German peers for the first time in four days. Equities also stabilized after the IBEX 35 Index yesterday suffered its biggest drop since August.

Economic output in the fourth quarter was slightly better than anticipated in September, Spain’s central bank said, even as it added that the main source of uncertainty for its growth outlook was associated with economic policy.

On Monday, hours after Rajoy’s People’s Party lost its parliamentary majority, Spain’s sovereign bonds trailed behind their German and Italian counterparts on investor concern the country was set for a period of instability. The Socialists said they’ll vote against Rajoy if he seeks parliamentary approval for a second term, while the anti-austerity Podemos movement has said it will vote against the premier in all circumstances.

‘More Relaxed’

“The market seems to be more relaxed today because it’s more or less speculating on some kind of grand coalition” of conservative and Socialist parties, said Daniel Lenz, lead market strategist at DZ Bank AG in Frankfurt. “It’s still not a major crisis. It would have been if there had been a majority government including Podemos. Nevertheless we will have probably a long time of uncertainty and there is a risk of a gradual underperformance by Spain.”

Yields on Spain’s 10-year bonds climbed three basis points, or 0.03 percentage point, to 1.80 percent as of 4:34 p.m. London time, after jumping to 1.88 percent on Monday, the highest since Nov. 11. The 2.15 percent bond due in October 2025 fell 0.265, or 2.65 euros per 1,000-euro ($1,097) face value, to 103.095. The nation’s two-year notes yielded 0.1 percent.

The IBEX 35 index of shares advanced 0.4 percent after tumbling 3.6 percent Monday, the steepest decline since Aug. 24.

Benchmark German 10-year bund yields rose five basis points to 0.6 percent. The yield difference versus similar-maturity Spanish peers was 120 basis points, having widened Monday to 130 basis points, the most since Nov. 10. The spread has narrowed from almost 650 basis points at the height of the region’s sovereign-debt crisis.

Trading in German 10-year bund futures on Deutsche Boerse AG’s Eurex fell on Monday to the lowest since Oct. 12, with 277,409 contracts changing hands, reflecting muted activity before the Christmas holiday. Low volumes probably exaggerated moves in yields, said Owen Callan, a Dublin-based fixed-income strategist at Cantor Fitzgerald LP.

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