LONDON: Euro zone bond yields rose on Monday with investors pushing political shifts in France and Spain aside and lightening up positions at the start of a week which could see the first Federal Reserve rate hike in nearly a decade.
There was no discernible impact on bond markets from the French elections on Sunday and no sense of increased nervousness before Spanish elections on Dec. 20, a sign that investors are more preoccupied with central bank moves than politics.
The European Central Bank's recently enhanced stimulus programme limits investors' desire to single out a sovereign where political risks are ticking up.
This year's experience in Greece, where far-left Syriza came to power on an anti-bailout platform only to end up agreeing on tougher-than-expected terms to stay in the euro, has also given investors confidence in Europe's status quo.
Tactical voting meant Marine Le Pen's far-right National Front (NF) did not win in any region, despite winning more votes than any other party nationally in last week's first round. But the polls were no real victory for the mainstream Conservatives and Socialists either.
"The outcome in France, for those fearing the extreme right wing, could have been much worse," said Elwin de Groot, senior market economist at Rabobank. "But the market is busy with other stuff which may be more acute, such as the upcoming Fed hike."
In Spain, surveys published on Monday suggested the conservative PP would top next weekend's poll, with the main opposition Socialists (PSOE) and two newcomers, liberal Ciudadanos and left-wing Podemos, following closely behind.
The four-party race raises worries about political stability in a country that has been praised by Brussels for undertaking painful fiscal reforms which have helped it onto a path of economic recovery that has surpassed the euro zone average.
The fragmented vote is unusual for Spain, where the PP and the PSOE have traditionally alternated in power. As in France, the economic crisis and high unemployment left many seeking alternatives to the usual ruling parties. German 10-year Bund yields, the benchmark for euro zone borrowing costs, rose 2 basis points to 0.56 percent. French and Spanish yields were up by a similar amount at 0.89 percent and 1.65 percent, respectively.
"NO DANGER"
Sunrise Brokers analyst Gianluca Ziglio said Greece's example showed any new government in a euro zone country, regardless of political colour, would still need to find ways to comply with requirements from Brussels and Berlin.
The alternative -- in Athens' case, crashing out of the euro -- would be less desirable.
"Unless someone really crazy gets power and has a very strong majority that allows them to do whatever they want to do, there's no real danger to the status quo," Ziglio said.
"And central banks are doing whatever possible to keep rates low and that opens up the opportunity for investors to do what they've been doing for a while, which is to buy more bonds than they should." Both Standard & Poor's and Fitch kept their credit ratings for France unchanged on Friday, before the second-round vote.
US T-note yields rose 4 bps to 2.18 percent. Investors remain nervous even though a rate hike has been well flagged by Fed Chair Janet Yellen and short-term US interest rates attach a very high probability to it.
The uncertainty relates to the consequences it could have for some vulnerable emerging markets and implicitly for global growth.
At the same time, the Fed's exit strategy after years of unprecedented bond-buying stimulus and free money is being closely scrutinised.
If the Fed hikes too much too quickly, the US recovery may be at risk. If it hikes too slowly, inflation may run out of control in the longer run.
"Maybe there's some position adjustment in the market. The hike is priced in but it's all about what Janet Yellen says afterwards," RIA Capital Markets bond strategist Nick Stamenkovic said.
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