Spanish Bonds Set for Volatility With Repeat Election Looming

  • 10-year yields jump most in 2016 Friday as U.K. chooses Brexit
  • Sunday’s election may once again be inconclusive, polls signal

Spanish government bonds may see more volatility next week after voters go to the polls Sunday to try to break a six-month political deadlock over who will govern the euro region’s fourth-largest economy.

The nation’s securities plunged on Friday, with the 10-year yield jumping the most this year, after Britain voted to quit the European Union. Riskier assets suffered as the decision threw uncertainty onto the political future of Europe, bolstering speculation other nations will move to hold similar referendums.

The yield premium on Spanish bonds over Germany widened to the most since 2014. The Spanish election may again prove to be inconclusive, with the People’s Party on track to remain the most-voted group, though short of a ruling majority. At the same time, anti-austerity party Podemos might clinch second place, the most recent polls indicate, possibly adding to the turmoil for investors.

“Brexit basically exacerbates all political risk within Europe,” said Peter Chatwell, head of rates strategy at Mizuho International Plc in London. “The protest vote just got more momentum, and we think there will be more inclination to vote against the established parties in the near term. This should be a boon for Podemos, and we would approach the weekend with caution.”

Spain’s 10-year bond yield jumped 17 basis points, or 0.17 percentage point, to 1.63 percent as of the 5 p.m. London close. The 1.95 percent security due in April 2026 dropped 1.53, or 15.30 euros per 1,000-euro ($1,112) face amount, to 102.87.

Risk Premium

The yield spread between Spanish 10-year bonds and similar-maturity German bunds jumped 31 basis points to 1.68 percentage point, the most since 2014 on a closing basis. Spanish bonds have returned 3.1 percent this year through June 23, compared with Germany’s 4.6 percent, according to Bloomberg World Bond Indexes. 

The Iberian nation has never gone so long with a caretaker government in modern democracy. Since the December election, when none of the parties won a majority or has since been able to form a ruling coalition, Podemos has gathered momentum and is set to displace the Socialists in second place in the elections, polls signal.

The rise of anti-austerity parties in European countries has deterred some investors. Portuguese bonds have been the region’s worst performers this year after Prime Minister Antonio Costa, who won out after an inconclusive election last year, reversed some of the measures that helped Portugal exit its bailout program in 2014.

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