Spain’s Yield Gap Tightest in More Than a Year on ECB Stimulus

(Bloomberg) -- The yield difference, or spread, between Spain's two- and 30-year government bonds narrowed to the least since April 2015, another sign that the European Central Bank's unprecedented asset-purchase program is boosting demand for longer-dated debt.

The ECB's 1.7 trillion-euro ($1.9 trillion) quantitative-easing plan is shielding Spanish securities from domestic political turmoil after elections in December and June failed to produce a majority government. Spain's 10-year bond yield dropped to a record.

“The pressure continues to be there for a flatter curve,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. “You have negative yields in a big part of the curve, which means investors are moving out to get some positive yield.”

Even after the ECB in December extended the planned end-date for its asset purchases to March 2017, there are few signs of economic recovery and inflation still far from the central bank's goal of just below two percent.

Britain's vote in June to leave the European Union triggered more stimulus from the Bank of England and underpinned the view that monetary easing from central banks will keep bond yields low. That's helped push investors toward longer-maturity debt in search of higher returns. 

Negative Yields

More than half of the $6.4 trillion worth of bonds that comprise Bloomberg's Eurozone Sovereign Bond Index now yield below zero. Securities that yield less than the ECB's deposit rate of minus 0.4 percent are ineligible for the central bank's buying program.

Spain's 10-year bond yields were little changed at 0.99 percent as of 4:04 p.m. London time, having dropped earlier to a record-low 0.97 percent. The price of the 1.95 percent security due in April 2026 was 108.85 percent of face value.

The nation's two-year note yielded minus 0.17 percent, while the yield on Spanish 30-year bonds was little changed at 2.02 percent. The yield spread between the securities was at 218 basis points, having earlier narrowed to 216 basis points.

“The maturity the ECB can buy is being pushed further out, the lower yields get,” Danske's von Mehren said. “As long as we have the economic uncertainty and inflation is low, this move out on the yield curve can continue.”

Benchmark German 10-year bund yields were little changed at minus 0.078 percent. The yield gap between Spanish and German 10-year securities narrowed to 1.04 percentage points, the least since December.

Spain's government debt returned 4.2 percent through Monday since June 24, the last trading day before the nation's latest elections, according to Bloomberg World Bond Indexes. That compares with an average 2.2 percent earned across the euro area, and 0.5 percent for German securities.

To contact the reporter on this story: Anooja Debnath in London at adebnath@bloomberg.net. To contact the editors responsible for this story: David Goodman at dgoodman28@bloomberg.net, Keith Jenkins