Spanish yields drop on election

Spanish government bonds jumped, pushing the yield down by the most in two years after acting prime minister Mariano Rajoy defied opinion polls to consolidate his position in the country’s general election after Brexit rocked the world’s financial markets last week.

Spanish yields drop on election

The nation’s 10-year bond yield fell below that of similar-maturity Italian sovereign securities for the first time since July after election results showed the caretaker premier and his People’s Party bolstered their position as the electorate shied away from the anti-establishment party Podemos, which polls wrongly forecast would come in second.

“Investors were expecting a large amount of political instability, so a small improvement from that — with a greater likelihood of a centre-right coalition or even a PP minority government — is enough to cause a rally in Spanish bonds,” said Antoine Bouvet, a London-based rates strategist at Mizuho International.

“Fundamentally though, the path toward a stable government remains unclear,” he added. `

Mr Rajoy must hold talks with competing parties that so far have blocked the path to extending his term at the helm of the eurozone’s fourth-biggest economy since inconclusive elections in December.

He told Spaniards yesterday he’ll finally have the foundations in place for a new government within the next month, an assertion that wasn’t seconded by the three other main parties.

The result “was quite inconclusive and we are back to square one,” said Piet Lammens, head of research at KBC Bank in Brussels.

“The outperformance of Spain today should not go too far,” he said.

Spain’s sovereign securities may stay volatile amid continued investor concern about UK voters’ choice of a Brexit, which pushed up Spain’s 10-year yield by the most this year.

Riskier assets suffered as the decision threw uncertainty onto the political future of Europe, bolstering speculation other nations will move to hold similar referendums.

The 10-year bond yield dropped 17 basis points to 1.46%, the biggest decline since June 2014.

The yields of similar-maturity Portuguese and Italian bonds, which often move with Spanish, fell less than 6 basis points each.

Mr Rajoy’s PP won 137 seats in the 350-strong Spanish chamber, followed by the Socialists with 85.

Anti-establishment group Podemos was unchanged at 71, while the liberals of Ciudadanos won 32.

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