September 25, 2019 / 11:28 AM / 22 days ago

UPDATE 1-Political risks lift euro zone debt; Spain shines

* Spanish bonds outperform

* 10-year yield edges closer to negative territory

* Political uncertainty adding worries on poor economic data (Recasts, updates with Spanish and Portuguese bonds, analyst comments)

By Yoruk Bahceli

LONDON, Sept 25 (Reuters) - Political risk and economic recession fears kept investors flocking into bonds on Wednesday, and Spanish debt was in high demand thanks to its yield pick-up over top-rated euro zone debt and a recent credit rating upgrade.

Yields on euro zone bonds have plunged this week as an impeachment inquiry into U.S. President Donald Trump and concern over Brexit add to investor worries about poor economic data, especially from Germany.

They are at their lowest since Sept. 12, when the European Central Bank unleashed a fresh wave of stimulus measures in an attempt to boost economic growth and inflation.

Spain has been the outperformer however, its 10-year yield falling 16 basis point so far this week, compared to 9 bps for the euro zone’s benchmark bond issuer Germany. The gap between the two narrowed 4 bps to 70 bps this week.

Spanish debt has been buoyed by a rating upgrade to ‘A’ by S&P Global. That’s alleviated some of the concern around politics as the country prepares for its fourth general election in four years.

“The political situation has been the same for four years but this has not derailed the economic success story,” said Antoine Bouvet, senior rates strategist at ING.

Spain’s 10-year bond yield fell 3 basis points on the day to 0.09%, edging closer to negative territory, while Portugal’s was down 2 bps, at 0.12%.

“The broader environment of hunt for yield and investors taking on credit risk is a bigger factor, while the rating upgrade might have allowed investors to jump in and buy Spain,” said Mizuho rates strategist Peter McCallum.

Despite the recent plunge, Spanish bonds still offer higher yields than the majority of euro zone government bonds, nearly 70% of which traded with negative yields in August.

McCallum predicted that, should the 10-year Bund fall to Mizuho’s fair value level at -0.75% from -0.61% currently, Spain’s 10-year yield would turn negative.

Across the rest of the euro zone, most 10-year yields slipped 1 bp on the day .

Political uncertainty is likely to keep bonds well bid — debt auctions in Germany and Italy were both well bid.

Democrats in the U.S. House of Representatives launched an impeachment inquiry into Trump, while the British parliament is reconvening after the UK Supreme Court decided the decision to suspend it for five weeks was unlawful.

All that comes on top of purchasing managers’ index readings and a German business sentiment survey showing deteriorating economic expectations.

French consumer confidence data provided a glimmer of hope however, with the reading at its highest level since January 2018.

Editing by Jacqueline Wong Editing by Chizu Nomiyama

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