Spain’s Bond Yield Falls to One-Year Low in Brexit-Selloff Pause

  • Nation’s 10-year yield reaches lowest since April 2015
  • Pro-establishment election reassuring post-Brexit: Commerzbank

Spanish bonds extended their rally, with other higher-yielding bonds in the region going along for the ride, amid a halt in the global market selloff that followed the Brexit vote.

The nation’s 10-year debt yield dropped to the lowest in more than a year, while German securities, perceived to be among the safest in Europe, lagged behind as investors favored assets with higher returns. The extra yield, or spread, buyers get for holding 10-year Italian bonds rather than their German counterparts has narrowed about 0.4 percentage point from its peak after the U.K. vote to leave the European Union as markets awaited signals on how the continent’s leaders will deal with the fallout.

EU leaders gathered in Brussels on Tuesday for a two-day summit that will be dominated by Brexit concerns.

Spain’s securities extended a rally from Monday that pushed 10-year yields down by the most since mid-2014. There were signs investors were also reassured by the presence of the European Central bank’s quantitative-easing program.

“People are desperate for yield, desperate not to miss a rally, and that’s driving some to want to hold duration and risk, despite the horrible scenario for the European economy in the months to come,” said Ciaran O’Hagan, head of European rates strategy at Societe Generale SA in Paris. “We know that the ECB is there in terms of its purchase program and that’s some consolation for sure, and that makes it easier for investors to come in.”

Spain’s 10-year bond yield fell 13 basis points, or 0.13 percentage point, to 1.32 percent as of 4:24 p.m. London time. The 1.95 percent security due in April 2026 climbed 1.255, or 12.55 euros per 1,000-euro ($1,106) face amount, to 105.765.

Post-Brexit Balm

The yield earlier touched 1.31 percent, the lowest since April 2015. On Monday it tumbled 18 basis points in the biggest drop since June 2014. Ireland’s 10-year bond yield fell 10 basis points to 0.64 percent, also the lowest since April 2015.

Politics may also be helping so-called peripheral euro-zone bonds to gain traction. Spain’s second general election in less than a year at the weekend may have left the country’s leadership in deadlock. Yet the anti-establishment Podemos party’s failure to improve on its December performance fueled speculation that some of the momentum enjoyed by populist parties across Europe may have been checked.

“A key message from the election is that the Spanish electorate voted unambiguously in favor of the establishment,” said Michael Leister, the Frankfurt-based head of rates strategy at Commerzbank AG. “The vote against populist parties is worth a lot these days, in this sort of Brexit world we’re living in now. That’s why we are seeing this reaction here.”

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