Spanish Bond Gains Push 10-Year Yield Below 1% for First Time

Updated on
  • Latest impetus for decline comes from Bank of England measures
  • Investors favor peripheral debt that still has positive yield

Spanish government bonds advanced, pushing the 10-year yield below 1 percent for the first time, as monetary easing by central banks across the developed world overshadows the nation’s struggles to form a government.

The yield has dropped by more than 0.6 percentage point since Spaniards in June voted in their second inconclusive election in six months, highlighting how local political risk is being offset by global easing. The extra yield, or spread, investors demand for holding the securities instead of similar-maturity German bunds narrowed to the lowest since December.

Investors in government debt are favoring so-called peripheral countries in Europe in search for positive returns, when more than one-third of all industrial-country securities now yields less than zero, or $8.9 billion of a total $25.4 billion of debt in the Bloomberg Global Developed Sovereign Bond Index. They’re also speculating that the European Central Bank may expand its 1.7 trillion-euro ($1.9 trillion) bond-buying program.

Yields have dropped on “some moderate expectation that changes to ECB purchasing rules may benefit Spain and Italy slightly,” said Owen Callan, a Dublin-based fixed-income strategist at Cantor Fitzgerald LP. There is “also a recognition that the Spanish political situation, though messy, is not the tail risk it was seen as at the start of the year.”

The latest impetus for yields moving lower came on Aug. 4, when the Bank of England cut its benchmark interest rate to a record-low 0.25 percent. The BOE on Monday resumed financial-asset purchases as it attempts to limit the economic fallout from Britain’s vote to leave the European Union, a decision that shook markets beyond the U.K.’s borders.

Wagers of Fed

Traders have already cut wagers on the Federal Reserve raising interest rates during 2016, while the European Central Bank has signaled a willingness to boost its stimulus if needed to move inflation toward its goal of just under 2 percent.

Spain’s 10-year bond yield fell three basis points, or 0.03 percentage point, to a record-low 0.99 percent as of 4:53 p.m. London time. The 1.95 percent security due in April 2026 gained 0.24, or 2.40 euros per 1,000-euro ($1,108) face amount, to 108.855.

Spanish government debt has returned 4 percent through Friday since June 24, the last trading day before elections, according to Bloomberg World Bond Indexes. That compares with an average 2.1 percent earned across the euro area in the period, and 0.6 percent for German securities.

— With assistance by Anooja Debnath

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