Spanish Bonds Decline as Focus Turns to Political, Fiscal Risks

  • Acting PM Rajoy likely to face confidence vote on Oct. 28
  • News brings ‘political and fiscal risk back’ to market: SEB

Spanish bonds dropped, pushing the 10-year yield to the highest in more than three weeks, amid speculation that caretaker Prime Minister Mariano Rajoy could face a confidence vote this month.

Spain’s securities led declines among euro-region sovereign debt. The country has been through two inconclusive elections since December and has repeatedly missed European Union targets to cut its budget deficit, which it’s unlikely to meet this year. Rajoy could undergo his first confidence vote on Oct. 28, Spanish paper El Mundo reported.

The nation’s bonds outperformed their Italian and Portuguese counterparts in the past month, according to Bloomberg World Bond Indexes, on the view that Spain’s political impasse was showing signs of easing.

“The headlines bring political and fiscal risk back to the market,” said Marius Daheim, a senior rates strategist at SEB AB in Frankfurt. “Even if the confidence vote will go well it will probably not pave the way for a sustainable political solution in Spain,” he said, adding this is having a “bearing on Spanish yields.”

Bonds Decline

Spain’s 10-year bond yield rose six basis points, or 0.06 percentage point, to 1.08 percent as of 1:19 p.m. London time, the highest since Sept. 19. The 1.95 percent security due in April 2026 fell 0.605, or 6.05 euros per 1,000-euro ($1,102) face amount, to 107.85.

Benchmark German 10-year bund yields increased five basis points to 0.07 percent, while those on similar-maturity Italian debt climbed five basis points to 1.43 percent.

Spanish government securities returned 0.7 percent in the past month through Tuesday, Bloomberg’s World Bond Indexes show. Italy’s handed investors a loss of 0.7 percent, while Portugal’s declined 0.6 percent and Germany’s dropped less than 0.1 percent.

Acting Economy Minister Luis de Guindos said Tuesday that Spain’s budget deficit will be 4.6 percent this year, far above the 3 percent of gross domestic product threshold for euro members. De Guindos said the nation will comply with budget deficit regulations but can’t take other measures for next year because Spain is ruled by an acting government.

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