LONDON: Low-rated debt from southern Europe led a renewed sell-off among euro zone government bonds on Wednesday, on expectations of higher inflation and what that could mean for the future of European Central Bank policy.
Italian and Spanish bond yields were up 7 to 8 basis points and Portuguese government bond yields hit their highest levels since February at one stage, rising 17 basis points to 3.70 percent, before settling down to 3.65 percent by midday.
"It's scary that the Portuguese bonds are the worst performers by a large margin despite the positive growth data from Tuesday," said Commerzbank strategist David Schnautz.
Portuguese growth accelerated sharply in the third quarter thanks to higher exports, with the economy expanding 0.8 percent in July-September from the preceding three-month period, the National Statistics Institute said on Tuesday.
The prospect of a $1-trillion fiscal spending boost, and higher inflation, following Donald Trump's victory in the US presidential election last week have pushed government bond yields higher across the developed world since the Nov. 8 vote.
Some analysts believe the ECB may be less inclined to extend its bond-buying stimulus programme, as had until recently been expected, against a backdrop of rising global interest rates.
"The thing most European investors are focusing on is what all this means for ECB policy, and peripheral countries have been the biggest beneficiary of ECB policy," ING strategist Benjamin Schroeder said.
That explains why South European government bonds have been hit particularly hard.
Italian 10-year bond yields, for example, have ranged between 1.60 percent and 2.16 percent over the past week. The 10-year yield last stood at 1.96 percent, up 6 basis points on the day, having earlier topped 2 percent.
It has been a see-saw week for euro zone bond markets. Yields hit their highest level for months on Monday, then fell sharply on Tuesday.
"There is still a lot of uncertainty over what Trump's policies will be and how that will affect Europe," said Schroeder.
On the one hand, the prospect of expansionary policies and higher inflation has pushed up bond yields across the developed world, he said. On the other, US protectionism might damage emerging markets and hurt the outlook for global growth.
Italy is considered the most vulnerable to political risk. Opinion polls are making increasingly grim reading for Italian Prime Minister Matteo Renzi, less than three weeks before a referendum on constitutional reform on which he has staked his political future.
There were losses across the board in euro zone bond markets, albeit a touch more muted for the higher-grade countries.
Germany's benchmark 10-year bonds saw their yields rise 3 basis points to 0.33 percent.
"This means that spreads (between lower and higher-rated countries) keep widening, and with auctions in France and Spain due tomorrow, that may push spreads even wider," said Schnautz.
Italy's 10-year spread to German equivalents is close at its highest level since October 2014 at 169 basis points.
Comments
Comments are closed for this article.