Euro Bond Spreads tighten on Brighter Economic, Political Prospects

The premium investors demand for holding lower-rated southern European bonds over top-rated German peers fell sharply on Tuesday, in a sign of growing confidence in the bloc’s economic and political outlook.

Bond yields in Italy, Spain and Portugal all fell 4-5 basis points each , with sentiment buoyed by talks between the bloc’s main powers, Germany and France, which may open the door to changing treaties to facilitate ambitious reform.

A robust first quarter growth report for the bloc gave a further boost.

The gap between 10-year Italian and German bond yields dropped below 180 basis points for the first time in a week and was down from 185 bps on Monday. The Portuguese/German 10-year yield spread fell below 300 bps to its tightest level since August.

“There is risk on sentiment, thanks to solid economic indicators,” said Sebastian Fellechner, a rates strategist at DZ Bank. “Political risks have also faded and (French President Emmanuel) Macron’s visit to Berlin is also contributing to the move.”

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell