Key bond yield at 2010 level despite Lisbon budget woes

The Spanish sovereign debt market shrugged off the setback meted out by the Constitutional Court to Portuguese Prime Minister Pedro Passos Coelho’s austerity program, preferring instead to focus on the economic stimulus plan unveiled by Japan.

The latter sparked an increase in investors’ appetite for Spanish government bonds, leading to a fall in yields, which in the case of the benchmark 10-year bond hit its lowest level since October 2010.

A flood of buy orders at the outset of the session pushed the 10-year bond yield to 4.64 percent. That in turn helped narrow the spread with the German equivalent by 11 basis points from Friday’s closing level to 342. Italy also made up ground, with its risk premium falling to 310 basis points. However, the rally started to peter out later, with Spain’s risk premium ending the day down just three basis points at 350 basis points.

The yield on two-year government bonds, which would enter into the scope of any sovereign debt purchases by the European Central Bank, dropped below two percent for the first time since October three years ago — just before Ireland became the second euro-zone country after Greece to ask its European partners for a bailout.

The main driving force behind the improvement has been the fact that the market is awash with liquidity and Spain still offers attractive yields.