Yield on 10-year bond falls below four-percent level

Risk premium down close to 230 basis points as markets confidence in Spain returns

The markets are continuing to show a vote of confidence in Spain. The return on the 10-year bond in the secondary debt market has fallen below four percent for the first time since May 3.

The 10-year bond is used for the calculation of the country’s risk premium, measuring the return on the bond against the benchmark German 10-year bond, which is considered to be the safest investment and is, as such, used as a reference point.

The risk premium can, then, fall for two reasons: the returns on Spanish bonds fall, or the returns on German bonds rise, thus reducing the differential between the two.

Spain’s risk premium is currently hovering around the 233 basis point mark, which is four points lower than seen on Wednesday. The fall has, however, been slower than that of the 10-year bonds, given that although the price of Spanish debt has fallen, the German bond is still at a very low level, at around 1.6 percent. That said, Spain’s risk premium is also in a strong position, nearing levels last seen in August 2011.

Spanish 10-year bonds hit their high in July 2012, when investors were demanding 7.5 percent rates in the secondary market. Since then the figure has been falling.

Before the economic crisis hit Spain in 2008, the Spanish 10-year bond offered yields in the secondary market of between 3.5 and 4 percent. Those figure were just a few tenths higher than the benchmark German bond.

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