Spanish Bonds Advance as Political, Economic Risks Diminish

  • Spain’s bonds rise as Socialists vote to end political impasse
  • Portugal’s debt retains investment-grade rating with DBRS

Spain’s bonds rose along with Portugal’s as political and economic risks across the euro region diminished, boosting demand for fixed-income securities.

The extra yield on Spanish’s 10-year debt over benchmark German bunds narrowed for the first time in five days after the Socialist party leadership agreed on Sunday to let acting Prime Minister Mariano Rajoy take office for a second term. Portugal’s 10-year yields fell to the lowest level in six weeks after DBRS Ltd. maintained the nation’s credit rating at investment grade, securing eligibility of the country’s debt for the European Central Bank’s asset-purchase program.

France’s 10-year bond yields touched a three-week low after S&P Global Ratings revised its outlook to stable from negative, saying that downside risks to the nation’s economy identified two years ago have not materialized.

The developments in Spain and Portugal removed two question marks that have been hanging over the market. Concern that Portugal, whose debt is rated junk by S&P, Fitch Ratings and Moody’s Investors Service, would lose its only investment grade weighed on its bonds, making them the developed world’s worst performers this year. The fear in Spain was that the country would head for its third election in less than a year as it struggled to form a stable government since a first vote in December.

“Going into the end of last week, a few sources of risks were on the table,” said Orlando Green, a rates strategist at Credit Agricole SA’s corporate- and investment-banking unit in London. “However, credit ratings risks for France have eased and crucially Portugal has seen a reaffirmation of its credit rating by DBRS, which has given sovereign spreads impetus to tighten.”

Yields Slide

Spain’s 10-year bond yield dropped two basis points, or 0.02 percentage point, to 1.10 percent as of 4:05 p.m. in London. The 1.3 percent security due in October 2026 rose 0.16, or 1.60 euros per 1,000-euro ($1,089) face amount, to 101.90. The yield earlier touched 1.05 percent, the lowest since Oct. 12.

Germany’s 10-year bund yields increased two basis points to 0.03 percent, leaving the spread between the securities at 107 basis points. The gap reached 111 basis points on Friday, the widest since Sept. 2.

The yield on similar-maturity Portuguese bonds dropped four basis points to 3.15 percent, after touching 3.02 percent, the lowest since Sept. 8. French 10-year debt yields added one basis point to 0.30 percent, having earlier dropped to 0.25 percent, the lowest since Oct. 4.

Speculation that the ECB’s bond buying, or quantitative easing, will be extended is also supporting the region’s debt. ECB President Mario Draghi said on Oct. 20 that policy makers didn’t discuss tapering purchases. A majority of respondents to a Bloomberg survey conducted Oct. 7-14 predict the central bank will announce changes to its QE program at its December meeting.

“We’re getting a new government in Spain,” said Holger Sandte, chief European analyst at Nordea Markets in Copenhagen. “That’s positive because there is no longer doubt about stability or when there will be the next elections. If the ECB decides to extend purchases, Spain’s spreads can still narrow.”

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