Risk premium at lowest since early July after Rajoy remarks

Prime Minister Mariano Rajoy’s openness to asking the European Central Bank (ECB) for more help from the Europe’s rescue funds has served as soothing balm to the Spanish debt market.

Spain’s risk premium, the difference between the return on the Spanish benchmark 10-year government bond and the German equivalent, dropped to 507 basis points on Wednesday, 18 points fewer than the previous day.

The fall is identical to that on Tuesday after the prime minister announced he would not rule out asking for more European rescue money, which also helped sales of German debt, raising its yield and reducing the difference.

As the markets wait to see if Rajoy decides whether to ask for more help from Brussels, the risk premium reached its lowest level since July 5, the day the ECB reduced interest rates to an all-time low of 0.75 percent.

The recovery allowed the yield on the Treasury’s 10-year bonds in the secondary market, where bonds are traded once they are issued, to drop to 6.650 percent. The yields demanded by investors on the rest of Spanish paper also declined, indicating slightly more trust in Spanish debt.

But the main driver behind the recovery is the possibility that, if the government does request a bailout, the ECB would start to buy short-term bonds in the market. The Madrid stock exchange rose slightly although trading levels were low due to Wednesday’s public holiday.