Spanish Bonds Drop as Rally Seen Excessive Amid Political Risks

  • 10-year yield still lower versus Germany’s from week earlier
  • Bonds decline from levels reached amid Greece creditors’ deal

Spain’s government bonds declined as investors questioned the sustainability of a rally that had pushed 10-year yields to the lowest level in six weeks, as signs of weakness re-emerged for the nation’s banks.

Italy’s sovereign securities fell for the first time in three days, paring an advance that was partly driven by investor relief that Greece struck a deal with its creditors. The extra yield, or spread, that investors get for holding Spanish or Italian 10-year bonds instead of similar-maturity German bunds has still dropped this week, as European share-price increases fueled demand for higher-yielding assets.

Spain’s Banco Popular Espanol SA provided a timely reminder of the risks in the nation’s economy, plunging to the lowest in 26 years Thursday in the stock market, after the bank announced a 2.5 billion-euro ($2.8 billion) share sale to repair its balance sheet.

While Greece avoided a repeat of last year’s drama that saw it almost forced out of the euro area, investors over the next month have to contend with the British referendum on European Union membership, Spain’s election and the possibility of an increase in U.S. interest rates.

To see a story on Greece’s difficulties on road to redemption, click here

‘Event Risks’

“Improved risk appetite has supported peripherals recently,” said Nick Stamenkovic, a strategist at broker RIA Capital Markets Ltd. in Edinburgh. “Investors are still wary because of event risks going forward, so it’s difficult to see spreads narrowing sharply near term, particularly ahead of the EU referendum.”

The Spanish anti-establishment party Podemos plans to explore ways to lighten the burden of Spain’s 1.1 trillion euros of public debt in talks with creditors if it can seal a role in the new government after next month’s vote.

Spain’s 10-year bond yield rose three basis points, or 0.03 percentage point, to 1.50 percent as of 4:09 p.m. London time, having earlier dropped to 1.46 percent, the lowest since April 14. The 1.95 percent security due in April 2026 fell 0.26, or 2.60 euros per 1,000-euro face amount, to 104.13. Yields on similar-maturity Italian bonds increased two basis points to 1.37 percent, still down 10 basis points since the end of last week.

Benchmark German 10-year bund yields were little changed at 0.15 percent, leaving the difference with Spain’s securities at 135 basis points, after being as low as 130 basis points, the narrowest since May 3.

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