Spain Doubles Return for Bond Investors This Year With Rajoy Win

  • 10-year bonds have their best three-day rally since 2013
  • Acting PM’s Popular Party still lacks clear formula to rule

Bond investors reckon Mariano Rajoy is a shoo-in for a second term as prime minister of Spain even if political analysts say there are plenty of hurdles still ahead.

Money managers have been buying 10-year bonds, producing the best three-day rally since 2013, after Rajoy’s People’s Party won more votes than expected in an election on June 26. The yield dropped below that of comparable Italian bonds for the first time in a year, signaling investors see a brighter outlook for the Iberian nation amid the turmoil in financial markets triggered by Britain’s decision to leave the European Union three days earlier.

“We favor Spanish bonds over the medium term,” said Mohit Kumar, head of rates strategy at Credit Agricole SA’s corporate and investment bank in London. “Political risk in Spain was one of the key investor concerns, however, the election results were more market friendly than expected.”

After almost seven months of political deadlock, Spain appears closer to forming a viable government. Should rival parties let Rajoy lead again even in a minority administration, Spain can begin drafting next year’s budget and negotiate further spending adjustments with the EU while trying to avoid an EU fine for persistently missing its deficit-cutting goals.

Spain’s 10-year bond yield has dropped about 37 basis points, or 0.37 percentage point, since the election results. In the first three days of this week, the securities handed investors a 2.4 percent return, according to the Bloomberg World Bond Indexes, adding to a 2.3 percent gain for the year through Friday.

The rally prompted market speculation the nation may issue a new 10-year bond in the coming weeks to take advantage of cheaper borrowing costs.

“This is a golden opportunity for the Treasury, given the market friendly-reaction to the election result,” said Jaime Costero, rate strategist for Banco Bilbao Vizcaya Argentaria SA in Madrid.

No Majority

The acting prime minister’s party increased its representation in parliament to 137 seats from 123 as all his rivals fell back. Even so, he’s still 39 votes short of a majority in the 350-seat chamber and none of his opponents are ready to fold just yet.

Socialist spokesman Antonio Hernando vowed the day after elections that his party will vote against Rajoy if he tries to win the support of parliament, as did Ciudadanos leader Albert Rivera. No analyst thinks the anti-establishment group Podemos will help either. Between them, those three parties have 188 seats in parliament, enough to keep Rajoy’s PP out should they stick to their guns. That remains a question mark.

‘Likely Scenario’

“A PP-led minority government is still the most likely scenario, but the process to get there will not be smooth,” Antonio Barroso, an analyst at Teneo Intelligence in London, said in a note to clients. “Negotiations are unlikely to be straightforward.”

While Podemos lost more than 1 million votes this time around, the group can still give angst to investors who are reeling from Britain’s choice to quit the EU.

“We fear the implications of Brexit may well turn out to be systemic in nature for Europe over the medium term,” said Peter Chatwell, head of rates strategy at Mizuho International Plc. “The U.K. is far from being the only EU member with high levels of income and wealth inequality and is far from being the only EU member where the public has gotten disenfranchised with the political class.”

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