Spanish 10 year bond yields are leaping for a second day in a row, rising to 6.27% at the time of writing. These levels were last seen in August. 2 year yields are at a record high of 5.13%.
Spaniards will go to the polls on Sunday, November 20th. They are expected to oust the current socialist government and select the opposition center-right PP party. This seems quite certain. But it isn’t certain if the PP party will obtain an absolute majority in parliament. It seems that the markets, in which the ECB is major player, want an absolute majority and are amplifying Spain’s delicate economic situation.
ECB Calling the Shots
The ECB has been buying Spanish and Italian bonds since August and sent Spanish 10 year yields from 6.30% to around 5%. They resumed their rises since then and they are leaping now.
Jean-Claude Trichet, the former president of the ECB, sent a list of demands to Italy before the first interventions. Spain moved to make budget cuts and even introduced a debt ceiling in its constitution – something that required cooperation from both political parties.
Political Situation
The current government doesn’t have an absolute majority in parliament. Such a majority would allow swifter moves. Some recent polls show that Mariano Rajoy’s PP party can take an absolute majority and win 200 out of 350 seats, but other polls swing around the borderline number of 176 seats.
Higher yields and a higher risk premium over German bunds (currently around 4.4% or 440 basis points) adds pressure on the current government and can move some undecided voters to the polls. Alfredo Pérez Rubalcaba, the socialist leader in these elections, was the Home Minister until recently.
The current PPrime Minister, Zapatero, announced that he wouldn’t seek reelection. The unemployment rate in Spain is above 20% for a very long time, with youth unemployment above 40%. This is one of the most important things on the agenda.
EUR/USD
In any case, these jumps in Spanish yields weigh on the euro. EUR/USD is trading lower, currently at 1.3570, above support at 1.3550. Resistance is at 1.3650.
For more on the euro, see the EUR/USD forecast.
