World Economy

Bond Yields Lead Eurozone Lower, Germany Lags

Bond Yields Lead Eurozone Lower, Germany LagsBond Yields Lead Eurozone Lower, Germany Lags

Peripheral government bonds led eurozone yields lower on Monday, with German bonds underperforming a day after voters punished Chancellor Angela Merkel’s conservatives in three German regional elections.

Southern Europe is seen as the main beneficiary of last week’s monetary easing from the European Central Bank, pushing bond yields in the periphery down 2-5 basis points, Reuters reported.

But there was also focus on Germany where Merkel’s Christian Democrats lost ground in all three states holding elections on Sunday—giving a thumbs-down to her open-door refugee policy and turning in droves to the anti-immigrant Alternative for Germany party.

The result is a big setback for Merkel, who has led Europe’s biggest economy for a decade.

“The election outcome in general is not surprising, but what is surprising is the share of the vote taken by the AfD and the scale of losses for Merkel’s party,” said DZ Bank strategist Daniel Lenz.

Germany’s benchmark 10-year Bund yield was down 1.5 basis points at 0.26%, more than 15 basis points above 10-month lows hit last month and underperforming most other eurozone bond yields. French 10-year bond yields fell 2 basis points.

The yield gap between German and US 10-year bond yields was at 171 basis points, holding close to its widest level in more than three months.

Analysts said that while the German regional election results were unlikely to have a marked impact on German bonds—seen as one of the safest assets in the world—the election results did introduce an element of political risk.

“The progress made by the Eurosceptic AfD adds to the already long list of political risk in Europe,” Mizuho rates strategist Antoine Bouvet said in a note.

Spanish, Portuguese and Italian 10-year bond yields were heading back towards lows hit in the wake of last Thursday’s ECB meeting. The ECB raised monthly asset purchases to €80 billion from €60 billion and cut its deposit rate by 10 basis points to -0.4%.

The bank also said it would buy corporate debt and offered to pay banks for lending to companies in the ailing eurozone in a bid to kickstart growth and stave off the threat of deflation.

“It takes time for the impact of the ECB’s easing to come through and it does look like the package was geared towards peripheral Europe, which should be supported,” said Commerzbank interest rate strategist David Schnautz.

Elsewhere, Finnish bonds showed little immediate reaction to a Fitch Ratings downgrade of Finland to AA+ from AAA.