ECB’s bond buying buys time for Spain after election

The sound of bickering among Spanish politicians is being drowned out by Mario Draghi, at least when it comes to the bond market.

Spain’s election on December 20 ended a four-year majority for Prime Minister Mariano Rajoy and left a deadlock over who will form the next government as parliament reconvenes this week.

The ECB’s bond purchase programme or quantitative easing is buying politicians time as they argue over who should run the euro region’s fourth-biggest economy.

The yield on 10-year bonds compared with German bunds has risen just six basis points since the vote.

“Spanish politics are not really driving the bond market for the time being,” said Mark Dowding, a partner at BlueBay Asset Management in London.

Bonds “should not be materially impacted when the greater backdrop is ultra-low eurozone bond yields and QE purchases from the ECB.”

European bonds are being insulated from the type of sell-off that characterised the continent’s debt crisis when investors reacted to every political twist and turn and borrowing costs jumped towards unsustainable levels.

Spain’s impasse follows Portugal as parties that traditionally traded power are undermined by jaded voters pining for change, while the market hardly flinches.

Portugal had to appoint two prime ministers in the seven weeks following an October 4 election, which left neither of the two main parties with a majority in parliament.

During that time, the spread between 10-year government bonds and bunds widened 22 basis points as the ECB spends €60 billion a month buying up debt.

The yield on 10-year bonds was 1.74% for Spain yesterday, while in Portugal they were 2.62%.

Spain still pays less than the UK, where the economy is growing at a similar pace and an election last May produced a clear winner.

If investors perceive there’s a risk of a government that would reverse labour and banking reforms and increase public spending, borrowing costs will rise, said Luis de Guindos, economy minister under Mr Rajoy.

Spanish party leaders are exploring ways out of their political labyrinth as the nation emerges from austerity into a new stage of growth.


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