Spain’s government bonds fall after indecisive election

Spain’s government bonds fell for the first time in four days after an indecisive election that left Prime Minister Mariano Rajoy with limited options to forge a governing majority, threatening a period of instability.

While Rajoy’s People’s Party placed first in Sunday’s election, earning the right to try to form government, the results suggest the only party able to form a majority with him in the 350-member parliament would be historic rivals, the Socialists. The PP returned 123 lawmakers to 90 for the Socialists, as anti-austerity party Podemos placed third with 69 seats. The liberal Ciudadanos party, a possible coalition ally for Rajoy, got 40 seats. A majority of the 20 economists surveyed by Bloomberg said last week a relatively conservative government made up of the ruling PP, and newcomers Ciudadanos, who are frequently described as centrists, would be the best outcome for the economy.

Monday is the last day of European Central Bank bond purchases until January 4th. “The election outcome failed to provide us a clear picture of who will take power,” said Anders Moller Lumholtz, chief analyst with Danske Bank A/S in Copenhagen. “It is likely to take time before we get clarity, and uncertainty is not a friend of the market. We think Spain could widen up to 10 basis points versus Italy. ECB QE buying could cushion some of the knee-jerk reaction, but as Monday is the last day before the QE goes on pause we probably shouldn’t expect much effect from that side.”

While an inconclusive election result was widely anticipated, Spain’s securities have been relatively stable in the run-up to the vote, with the European Central Bank’s bond- purchase plan insulating them from the type of selloff that characterized the region’s debt crisis. Portuguese bonds saw only short-lived volatility last month, even as Socialist opposition lawmakers ousted former Prime Minister Pedro Passos Coelho. Even so, Spanish bonds have still underperformed most of their peripheral peers this year, according to Bloomberg World Bond Indexes. Holders of the securities have earned 1.9 per cent this year through December 18th, while Italy’s debt gained 5 per cent, according to the indexes. The average across the euro zone was 2.3 per cent. Yields on Spain’s 10-year bonds increased nine basis points, or 0.09 percentage point, to 1.78 per cent as of 7:11 a.m. London time. While that’s above the record low of 1.048 per cent set in March, it’s less than a quarter of the 7.75 per cent level reached in 2012.

Bloomberg