Eurozone government bonds ended the first quarter on a cautious note, with investors nervous about fiscal discipline in Spain, growth prospects for the bloc, and reform risks stemming from Greek and French elections in the next three months.
Benchmark German Bunds were steady on Friday, while Italian and Spanish bond yields were slightly lower after Spain revealed deep budget cuts in a bid to convince European partners and debt investors that it can meet its fiscal targets.
Investors' reluctance to embark on any risky trade before the turn of the quarter thinned out volumes in the market and offered an opportunity to assess the risk the euro zone debt crisis will escalate again before the European summer.
Cash pumped by the European Central Bank cash into the banking system has fuelled a rally in peripheral bonds, especially Italian debt, which offered stellar first-quarter returns of over 10 percent.
But poor economic data in recent weeks have dampened the mood. Unless upcoming releases show growth picking up, Italian and Spanish bonds may face a difficult second quarter if worries intensify about a steeper recession that would make debt reduction even more difficult for the two countries. "People are stepping back a bit and now are wondering whether (the ECB effect) has dried up and what would be the next dynamics driving the market," one trader said.
"Spain is the story at the moment. We're going to have elections in Greece, the French elections are coming on the radar. People are less optimistic, we're probably going to be rangy for the next couple of weeks."
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