Euro zone bond markets steady as Brexit chances seen receding

LONDON: A sell-off in southern European bonds abated on Friday and yields on safe-haven German Bunds nudged back above zero as the murder of a pro-"Remain" British lawmaker was seen slightly reducing the chance of a Brexit vote next week.

Tensions emanating from Britain's vote on EU membership on June 23 has, over the last week, reopened a fault line between the haves and have-nots in the euro zone bond market in an echo of the debt crisis that threatened to tear the bloc apart.

However, Thursday's attack was seen as shifting opinions on the June 23 referendum and brought a halt to a sell-off in risk assets globally, with stocks strengthening and the pound bouncing off a 10-week low. Bookmakers' odds also showed the chances of Brexit decreasing.

Jo Cox, a member of parliament advocating Britain staying in the European Union, was killed on Thursday by a man who witnesses said shouted "Britain first".

Campaigning for the referendum was suspended and delayed the release of an opinion poll due out on Friday.

"The death of the MP yesterday has taken a bit of heat out of the referendum and might make people on the fence reassess which camp they really want to be supporting," Cantor Fitzgerald senior analyst Owen Callan said.

German 10-year bond yields - which have dropped more than 20 basis points (bps) over the last month on Brexit worries - rose 3 bps to 0.01 percent from a record low of minus 0.03 percent hit on Thursday.

There was also some respite from the sell-off in southern European bonds, which have been at the centre of concerns that Brexit has the potential to choke the bloc's fragile growth and embolden breakaway movements elsewhere in Europe.

Italian and Spanish 10-year yields fell 3 bps to 1.46 percent and 1.58 percent, respectively, while Portuguese equivalents fell 6 bps to 3.38 percent.

Crude oil prices also rose for the first time in seven days, helping market measures of long-term inflation expectations recover slightly.

But some analysts cautioned that the rise in risk sentiment may just be due to some investors taking profits rather than to a broader reassessment of the chances of Brexit.

"Today's apparent position-squaring moves should be seen as a blip rather than a reassessment of Brexit risks," Rabobank said in a note.

"We would expect risk-off to return as the dominant theme as the market reopens on Monday, four days ahead of the vote itself."