Supply weighs on euro zone bonds, Spanish yields at 1-month highs

LONDON : Spanish bond yields rose to their highest level in almost a month on Thursday, pushed up by new supply and the possibility of a third election in a year after Spain’s acting prime minister lost a vote of confidence in parliament.Across the euro zone, bond yields were 1-2 basis points higher as the first trading day of the month brought another large dose of supply and data showed British manufacturing recovering from the initial shock of June’s Brexit vote.

France and Spain sold about 13 billion euros of bonds as debt supply in the euro area rebounds after a summer lull.

Spain’s bond market, which has been under pressure this week as the country struggles to end months of political gridlock, came under additional pressure ahead of the auctions.

Its 10-year bond yield rose 6 basis points to 1.06 percent after Spain sold 4.5 billion euros of debt at auctions that saw yields fall across all maturities sold.

Mariano Rajoy, of the centre-right People’s Party (PP), received 170 votes of support in Wednesday’s parliamentary confidence vote, falling short of the minimum 176 needed to form a government. He needed the support of the Socialists, who voted unanimously against him, to win the required absolute majority.

Rajoy now faces a second vote on Friday in which delegates can abstain and a simple majority of those voting would allow him to form a PP-led minority government, but a loss is also likely if the Socialists again choose to vote against him.

“We think there will be a last minute agreement as it makes sense for all parties and it is risky for them to again put the electorate to the test,” said Societe General strategist Ciaran O’Hagan.

The run-up to Wednesday’s confidence vote and a perception that the political uncertainty that has dogged Spain since inconclusive elections in December and June is likely to continue has seen a risk premium priced back into Spanish bonds.

While the economy has held up well, structural reforms and economic growth will suffer as long as political uncertainty drag on, analysts say.

The spread between Spanish and German Bund yields is hovering around 113 basis points. It dipped below 100 bps last month on hopes that Rajoy may be able to form a new government.

Data showing a closely watched gauge of factory activity in Britain jumped to a 10-month high in August meanwhile weighed on broader European bond markets.

“We are seeing a spillover from the UK where gilts sold off after the data and there’s also been supply pressure today,” said Martin van Vliet, senior rates strategist at ING.