Spanish bond yields hit record low as coalition talks progress

LONDON: Spanish government bond yields dropped to a record low on Thursday as acting prime minister Mariano Rajoy edged closer to securing a second term in office and ending a near eight-month political deadlock.

This came against the backdrop of a broad rally in low-rated euro zone government bonds this week on expectations that the European Central Bank will move further down the ratings spectrum to fulfil its asset purchase programme.

Spain's 10-year bond yield fell as much as 3 basis points to a low of 0.92 percent, squeezing the gap over German equivalents to 109 bps - its tightest level this year, according to Tradeweb data. In addition, the spread between Spain's two- and 30-year debt was at 213 bps, the lowest level since April 2015.

"Spain is clearly below the 1 percent mark now, partly on hopes that the political risks have come down and that a third election could be avoided," said Christoph Rieger, rates strategist for Commerzbank.

Rajoy announced on Wednesday that his conservative party's leadership would vote next Wednesday on a reform pact proposed by centrists Ciudadanos as a condition of their support in forming a government.

That has increased hopes that Rajoy will form a minority government in a country that has struggled to break a political deadlock since inconclusive elections in December 2015 and June 2016.

Spain led a fall in southern European bond yields. The yield on Italy's 10-year bond was down 1.6 bps, having hit a new 17-month low at 1.05 percent. Portugal's 10-year bond yield touched a four-month low of 2.75 percent, meaning the yield has fallen 14 bps since the end of last week.

"Peripheral Europe is having a good session, and I can't see it as anything more than a focus on central bank action globally," said Lyn Graham-Taylor, a strategist at Rabobank.

"There's some noise from the BoJ (Bank of Japan) that September isn't going to herald the end of quantitative easing, the Bank of England has started QE again and the New Zealand central bank has cut rates."

New Zealand's central bank on Thursday joined the worldwide rate-cutting by lowering its official cash rate 25 basis points to 2.0 percent and said that further policy easing will be required.