Spanish bonds are getting clobbered after its election surprise

Spain’s general election on Sunday ended in uncertainty.

While Mariano Rajoy, incumbent prime minister and leader of the centre right, proclaimed himself the winner, his party failed to get enough seats for an outright majority.

That means he’ll have to form a coalition government, leading to a lot of political uncertainty in the short-term.

And there’s very little the sovereign bond market hates more than uncertainty.

The yield on the Spanish 10-year bond spiked up 0.135 of a percentage point to 1.825%.

Higher yields mean the price of the bond is falling in the secondary market because it’s perceived to be riskier. And, while that doesn’t sound like a big rise, it is a 7% hike in the yield on Spanish bonds in around 24 hours and a sharp movement in the market.

Here’s the chart from Bloomberg:

The big surprise of the election was the poor performance of the Ciudadanos (Citizens) party and the relative popularity of the left-wing, anti-austerity Podemos party. Ciudadanos’ disappointing showing makes a secure coalition with Rajoy more difficult.

Here’s Deutsche Bank analyst Marco Stringa in a note to clients on Monday (emphasis ours):

The Spanish general election confirmed the end of the PP-PSOE political duopoly at national level. But the main surprise was the extent of the under performance of liberal-reformist Citizens relative to opinion polls. This changes the post-election scenarios — a centre-right coalition cannot reach a majority — and injects even greater political uncertainty. This is unlikely to be a positive development for markets.

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