LONDON: A split in euro zone bond markets, created by worries around Britain's upcoming referendum on its EU membership, narrowed for a second straight day on Monday after polls showed the 'remain' camp recovering some momentum.
Yields on German bonds -- the EU's top-rated debt seen as a refuge in time of stress -- rose near a two-week high while investors returned to southern European bonds and stocks that carry more risk but offer greater returns.
This trend started late last week after the murder of a British lawmaker was seen reducing the chance of a Brexit vote on June 23, and continued on Monday after three weekend polls showed the 'remain' camp had regained its lead over 'leave'.
"We have had a pretty strong turnaround in risk appetite as the perceived chance of a leave victory has receded," said Mizuho rates strategist Antoine Bouvet, adding that investors are closely following changes in bookmakers' odds.
The implied probability of a British vote to remain in the EU rose to around 75 percent on Monday, according to Betfair betting odds, having been as low as 60 percent last Thursday.
German 10-year bond yields rose 4 basis points to 0.06 percent, the highest since June 9 and up 10 bps from a record low of minus 0.037 percent seen before Thursday's fatal attack on Jo Cox, an ardent supporter of EU membership.
The only opinion poll fully carried out since the killing showed support for remain at 45 percent, ahead of leave on 42 percent - a reversal of the 3-point lead the pollster, Survation, showed for leave in a poll conducted on Wednesday.
Two other polls published on Saturday showed the remain campaign in the lead, while another showed the two camps running neck and neck.
"It might be possible that the events influenced the polls but most experts commented that it is more likely that an expected and well documented 'pull to the status-quo' is responsible for the latest swing," RBC's chief European macro strategist, Peter Schaffrik, said.
Lower-rated bonds in Europe's southern periphery - which are seen as the most vulnerable to the economic and political headwinds that could arise from Brexit - recovered while stocks also found a firmer footing.
Spanish and Italian 10-year bond yields fell 7 bps to 1.49 percent and 1.38 percent, respectively, while Portuguese equivalents shed 12 bps to hit 3.22 percent.
The British pound was set for its biggest one-day gain in more than seven years, climbing 2 percent against the US dollar.
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