Spain’s Bonds Outperform Italy’s Even as a Third Election Looms

Updated on
  • Ten-year bond yield spread widens to the most in a week
  • Risks in Italy ‘far more critical’ than in Spain: DZ Bank

The prospect of a third election in Spain in a year has done little to curb investors’ appetite for the nation’s government bonds.

Spanish 10-year securities rose for a third day Tuesday, pushing the yield difference, or spread, with similar-maturity Italian debt to the most in a week, even as the probability of a third round of general elections in December increased after Acting Prime Minister Mariano Rajoy lost a second confidence in the parliament last week.

Italy is facing increased pressure on its banks and a referendum in the fourth quarter that may cost Premier Matteo Renzi his job, which for some analysts represents a bigger risk for bond investors than that of the Iberian nation.

“There’s a big question mark now behind the political future in Italy, and I would consider this as far more critical and more important than the situation in Spain,” said Daniel Lenz, a market strategist at DZ Bank AG in Frankfurt. “In case the referendum would fail, Renzi would step down or remain a lame duck until the next elections in 2018. Also, the chances for Italy speeding with reforms would then fade.”

Spain’s 10-year bond yield fell seven basis points, or 0.07 percentage point, to 0.94 percent as of 4:01 p.m. London time, extending a five basis-point drop over the previous two days. The 1.95 percent security due in April 2026 climbed 0.685, or 6.85 euros per 1,000-euro ($1,124) face amount, to 109.285.

Spread Widens

The yield on similar-maturity Italian bonds declined six basis points to 1.10 percent, leaving the spread between the securities at 16 basis points, the widest on a closing-price basis since Aug. 29. As recently as June, the yield on the Iberian nation’s bonds was higher than that of Italy’s.

Spain is struggling to find a way out of a political impasse that started when a first round of elections in December failed to produce an outright winner. Rajoy was defeated in two confidence votes in parliament last week, as Socialist lawmakers ignored his plea for abstentions to allow him to form a government.

An opinion poll published Monday showed the People’s Party would win up to 146 seats if third elections were held, from 137 seats now, which would give PP and Ciudadanos a majority if they combined votes. The Socialists would win 82-85 seats, compared with 85 now, according to the survey.

“Spain may have some setbacks in the near term if talks” to form a coalition fail, DZ Bank’s Lenz said, but “given the positive opinion polls, from the People’s Party perspective, Spain looks rather stable. Although the situation is still unclear, from a market’s perspective, the alternatives are not too bad.”

‘Positive Sign’

Germany’s bonds climbed as data showed U.S. services industries expanded last month at the slowest pace in six years, while German factory orders increased less in July than economists forecast.

The U.S. report “adds to the list of factors helping bonds today,” said Antoine Bouvet, a London-based rates strategist at Mizuho International Plc. Markets are “taking as a positive sign demand for today’s supply” after Austria auctioned 10-year debt, and bonds also benefited from the “weak economic data in the form of German factory orders.”

Germany’s 10-year bund yields fell as much as six basis points to minus 0.107 percent, the lowest level since Aug. 15.

The securities also rallied on Tuesday as traders speculate on how the European Central Bank will address a scarcity of eligible bonds to buy within its QE program. The majority of economists surveyed by Bloomberg said they expect policy makers to change the parameters of the program to avoid a potential shortage of securities. The Governing Council gathers on Wednesday for a two-day policy meeting.