Tale of two euro zone markets as core bonds and periphery part ways

Credit: REUTERS/Kai Pfaffenbach

By Dhara Ranasinghe

LONDON, Nov 15 (Reuters) - Sovereign borrowing costs in Germany and France were set on Friday for sizeable weekly declines, in contrast to southern European countries, which have come under heavy selling pressure again this week.

Ten-year bond yields in higher-rated euro zone economies were a touch higher after White House economic adviser Larry Kudlow said on Thursday that Washington was getting close to a trade agreement with China. That lifted investor confidence and hurt safe-haven assets.

Germany's 10-year Bund yield was at -0.34% DE10YT=RR, off levels hit on Thursday that were its lowest for more than a week.

But it was down 7 bps on the week, set for the biggest weekly fall since mid-August. Dutch 10-year bond yields were down a similar amount; French yields were 5 bps lower NL10YT=RR, FR10YT=RR.

Analysts said a recent selloff in top-rated bonds had gone too far, given uncertainty about the direction of U.S.-China trade talks, while recent data shows that world economic growth remains weak.

Data on Friday confirmed that euro zone inflation had slowed in October.

Bond yields in southern Europe, while lower on Friday, were set to end the week higher, a sign that sentiment towards the periphery has turned.

"In general, there has been risk aversion in recent days and a shift to core bond markets from the periphery," said Daniel Lenz, a rates strategist at DZ Bank.

"That's because investors are taking profits before year-end, but also because once Bunds get attractive, investors start to shift money away from the periphery."

Ten-year Italian bond yields were down 5 bps on the day at 1.38% IT10YT=RR, narrowing the gap over safer German Bund yields to 171 bps from around 173 bps the previous day, the widest since late August. But Italian yields are 11 bps higher on the week and set for a fourth straight week of rises.

Spain's 10-year yield gap over Germany is at its widest since mid-September at 79 bps DE10ES10=RR, reflecting concern that a possible coalition government of the Socialist and far-left Podemos parties will spend heavily.

After a rally in southern European bond markets this year, investors are locking in profits before year-end book closing, traders said. A growing sense that the European Central Bank is unlikely to deliver further stimulus soon has also soured sentiment towards peripheral debt markets.

"Volumes are very thin so every market movement is accentuated, but we are seeing a return to the past, with the peripheral countries - Italy but also Spain - which have become detached from the 'core' due to their internal political problems," said one Italian government bond trader.

A good week for bond marketshttps://tmsnrt.rs/2KkVom4

Bond market returns - southern Europehttps://tmsnrt.rs/2qXxK8A

A tale of two bond markets https://tmsnrt.rs/2Kp6aId

(Reporting by Dhara Ranasinghe; additional reporting by Valentina Za; editing by Larry King)

((Dhara.Ranasinghe@thomsonreuters.com; +442075422684;))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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