Spanish 10-year bond yield hits record low on hopes of end to political stalemate

LONDON: The yield on Spain's 10-year government bond fell to a record low on Thursday, pushed down by signs of progress to end the country's political deadlock.

Spain's acting prime minister Mariano Rajoy said on Thursday he had taken a "decisive step" towards forming a government by agreeing to a pact with a smaller rival, but still lacks the majority he needs for a second term.

The country has been mired in a political limbo since elections in December and June left all parties short of a majority and unable to agree on terms to govern together.

Rajoy, whose conservative People's Party came first in both ballots, said he was ready to face a parliamentary vote to form a government.

While he still lacks the backing he needs from the second-placed Socialists, progress made so far helped send Spanish bond yields to fresh record lows.

Spain's 10-year government bond yield fell as low as 0.909 percent, according to Reuters data, and was down almost 7 basis points on the day.

That pushed the gap over top-rated German Bund yields below 100 bps to its tightest level since April 2015. "We're seeing a significant improvement in sentiment towards Spanish bonds as investors hunt for yield and it is looking increasingly likely that Rajoy will be able to form a government," said Nick Stamenkovic, a bond strategist at RIA Capital Markets.

"The missing element is the Socialists but the risk premium has come down on Spain." Other euro zone bond yields were 1-3 bps lower, with the exception of Portugal.