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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