German election result weighs on bonds
Southern European government bonds underperformed yesterday after an unexpectedly weak election result for Germany's Angela Merkel led to concerns about the emergence of a more hardline stance towards the eurozone in the bloc's largest economy.
Ms Merkel secured a fourth term as chancellor but was weakened by a surge in support for the far right and investors were unsettled by the possibility that she may have to form a coalition with the pro-business Free Democrats (FDP) and Greens - the so-called 'Jamaica' coalition.
Some also said the German result could complicate the European Central Bank's policy path as it looks to scale back its monetary stimulus programme, which has driven down borrowing costs since its launch in 2015.
"The pro-market Free Democrats, as well as part of the CDU/CSU, oppose deeper financial integration in the euro area," analysts at Morgan Stanley said in a note. "This suggests headwinds to the euro and periphery."
The concerns came a day before French President Emmanuel Macron is due to announce his proposals for European Union reforms in a speech in Paris.
Lower-rated Spanish, Italian and Portuguese government bonds sold off and 10-year yields rose three basis points across the board in early trade.
They clawed back price losses as the session wore on, but remained underperformers on a day when higher-rated eurozone government bond yields fell four to five points.
The Italy-Germany 10-year government bond yield spread hit its widest in three weeks at around 170 points. Germany's 10-year bond yield hit an 11-day low of 0.395pc, down six points on the day in late trade on renewed jitters over North Korea. (Reuters)