Euro zone yields fall as politics outweigh supply expectations

Last Updated: Tue, Jan 10, 2017 15:22 hrs
Dealers work on the IG Group trading floor in London, Britain

By Abhinav Ramnarayan

LONDON (Reuters) - Euro zone bond yields dipped on Tuesday as concerns that Britain faced a "hard Brexit" when it leaves the European Union and other political events outweighed inflation and supply expectations.

Yields have been rising in the single currency bloc since the start of the year as strong economic data has increased expectations for growth and inflation. The prospect of a traditionally busy January of government borrowing have also pushed yields up as investors make room for new bonds.

However, some of these moves reversed after comments by British Prime Minister Theresa May fuelled expectations of a "hard Brexit" without access to the EU's single market and increased demand for safe-haven assets.

"Brexit is due to be triggered in March, and this is a foretaste of that, and it's also a reminder of other risk events such as elections in France and Italy," said ING strategist Martin van Vliet.

The concern is that after the UK's vote last June to leave the EU, similar anti-establishment sentiment lead to victories for anti-EU candidates in elections this year.

Votes are due in France, Italy and Germany, the region's three biggest economies.

These concerns tend to boost demand for safe-haven assets such as euro zone government bonds.

Germany's 10-year Bund yields shed a basis point to 0.28 percent before a sale of 10-year bonds, coming off Monday's three-week high of 0.325 percent.

On Wednesday, Germany is to auction 5 billion euros of new benchmark 10-year bonds. The German 10-year bond is also considered a benchmark for euro zone government debt.

The existing benchmark, which matures in August 2026, already has a hefty 25 billion euro outstanding size, large even by German standards, said van Vliet.

Other euro zone yields were also lower 1-2 basis points lower, with south European countries marginally outperforming better-rated countries.

Portugal led the way, its 10-year bond yields falling 3 bps to below 4 percent, while Italian and Spanish equivalents fell 2 bps each.

Tests for long-dated euro zone bonds lie ahead, with the Netherlands and Austria due to sell 30-year bonds via auctions later on Tuesday. Austria will also sell 10-year bonds.

The yield on outstanding 30-year bonds of the two countries were more or less flat before the sale.

(Reporting by Abhinav Ramnarayan; Editing by Tom Heneghan)

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