LONDON: Peripheral bond yields rose on Monday, as investors looked to book profits on recent price gains before potentially destabilising European elections.
Italian and Spanish bond yields quickly reversed an initial dip, rising 10 basis points to hit the day's highs of 3.06 percent and 3.17 percent, respectively.
"It's bad positioning," said Owen Callan, a senior analyst at Danske Bank.
"Everyone has gotten very, very long since the start of May with a lot of peripheral supply and expectations that the European Central Bank will give some fresh stimulus in June."
Weak EU economic growth data last week, weighed down by shrinking output in Italy and Portugal, gave the market some pause for thought, while a Greek tax on foreign investors added to selling pressures on bonds from the bloc's weaker debtors.
Analysts expect this reversal in sentiment to persist, driven by caution about European elections this week.
"There's an expectation that it might lead to extreme parties doing quite well," said one government bond trader commenting on Monday's yield rise. "I don't think the markets started focusing on it until quite recently."
Investors are watching Greek voters are particularly closely to gauge sentiment towards the coalition of Prime Minister Antonis Samaras, which came to power two years ago and holds just a two-seat majority in parliament.
Plans to scrap a legacy capital gains tax on foreign bondholders pushed bond yields initially down 10 bps on Monday from two-month highs, although most of those gains quickly eroded.
In an ominous sign for markets, Greece's anti-bailout Syriza party performed strongly in the first round of local elections on Sunday.
UPWARDS CYCLE
Irish bonds also failed to capitalise on Moody's two-notch upgrade late Friday. Ten-year yields initially dipped 4 bps at Monday's open, but were soon seen some 3 bps higher on the day at 2.72 percent.
At around 120 percent of GDP, Ireland still has one of the most bloated government debt burdens in the euro zone. But with gross domestic product set to grow at 2 percent this year, and further rating upgrades expected, Irish bonds are expected to outperform other heavily indebted states from the bloc's periphery.
"Ireland has come from being one of the weakest countries in the euro zone ... but now in an upwards rating cycle, Ireland should do better than its current peers," said Peter Schaffrik, head of European rates strategy at RBC.
Moody's upgraded Ireland's credit rating from Baa3 to Baa1 after European markets closed on Friday, bringing its view into line with the other two main ratings agencies.
Comments
Comments are closed for this article.