Uncertainty widens Italy, France bond yield gap with Germany

Political uncertainty in France and Italy widened the gap between their 10-year government bond yields and those of safe-haven Germany to multiyear highs on Wednesday. Irish bond prices remained firm, however, ahead of Thursday’s auction of up to €1.25 billion in new debt, with 10-year yields. or interest rates, at just over 1.1 per cent.

Upcoming elections in France, Germany, the Netherlands and, possibly, Italy, plus the ongoing debt crisis in Greece, have made investors risk-averse, analysts said, particularly given that bond purchases by the European Central Bank are on a downward trajectory.

"This time the ECB is in a less strong position to deal with the problems," said ING rates strategist Benjamin Schroeder. "Though they bought at a faster clip in January, the market knows that this will fall off."

The ECB is set to reduce its bond purchases from April onwards from the current rate of €80 billion per month to €60 billion until the end of 2017.

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Market speculation is that the central bank will taper purchases altogether soon after that, particularly given signs of improved growth and inflation in the euro zone and pressure from Germany.

Played down concerns

ECB president

Mario Draghi

looked to play down these concerns this week, saying the euro zone’s economic recovery was picking up strength but still required stimulus.

Uncertainty has been surrounding the single currency bloc in recent weeks. At the forefront are the anti-euro, far-right leader Marine Le Pen's bid for French presidency and the potential toppling of chancellor Angela Merkel when Germans go to the polls in the autumn.

In addition, investors in cash-strapped Greece appear to be losing faith in a pledge from European officials five years ago that the country’s default would be a one-off.

The gap between France’s 10-year government bond yield and the German 10-year bond yield – the benchmark for the region – rose to almost 79 basis points, the highest since November 2012.

The yield on Italy’s 10-year government bond, meanwhile, touched almost 202 basis points over Germany, higher than any closing price since February 2014.

Overall, Germany’s 10-year government bond yields fell two basis points on the day to 0.34 per cent, while south European government bond yields were up one to two basis points in early trades before trading flat as the session wore on.