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Caution over Dutch vote pushes euro zone bond yields lower
March 15, 2017 / 9:43 AM / 6 months ago

Caution over Dutch vote pushes euro zone bond yields lower

* Yields dip as market wary of populist surge in Dutch vote

* France’s 10-year govt bond yield spread to Germany edges higher

* Investors watch for hawkish signals from U.S. policymakers

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

By Abhinav Ramnarayan

LONDON, March 15 (Reuters) - Euro zone government bond yields dipped on Wednesday with investors reluctant to take major steps as Dutch voters went to the polls and the U.S. Federal Reserve looked set to deliver its first interest rate hike of the year.

The Dutch parliamentary elections are seen as a test of anti-establishment and anti-EU sentiment in the single currency bloc ahead of votes later this year in France and Germany, the two biggest economies in the euro zone.

A strong turnout for the PVV (Party for Freedom) of anti-Islam and anti-EU firebrand Geert Wilders may suggest a strengthening of far-right sentiment in the euro zone. The latest opinion polls put the centre-right VVD party of Prime Minister Mark Rutte ahead of the PVV by 3 percentage points.

“The repercussions for France are the key aspect of this election, and if we see that the populists are keeping their momentum that will be reflected in French government bonds,” said DZ bank strategist Christian Lenk.

France’s 10-year government bond yield rose 2 basis points in early trade to 1.12 percent before receding again, though the spread over Germany remained steady at around 66 basis points.

Most euro zone bond yields, having risen in early trade, were down 1-2 basis points. Germany’s 10-year government bond, the benchmark for the region, saw its yield fall 1 bp to 0.44 percent.

The gap between the 10-year borrowing costs of France and Germany has spiked in recent months from a September trough of 21 basis points, fuelled by the progress of anti-euro far-right leader Marine Le Pen ahead of presidential elections starting in April.

Le Pen and her FN party want to take France out of the single currency. Her bid for the Elysee Palace was given a boost this week after magistrates put one of her rivals, Francois Fillon, under formal investigation on suspicion of embezzling state funds.

HIKE LOOMS

Concerns over the Dutch election kept euro zone bond yields compressed despite the almost nailed-on certainty of a rate hike in the U.S. later on Wednesday.

In addition, investors will be keeping a close eye on whether or not U.S. policymakers signal tighter policy for the rest of the year.

“A 25 basis point rate hike is fully discounted following the sharp shift in official communication since Yellen’s testimony mid-February. Accordingly, guidance regarding the subsequent rate path will determine the market reaction,” Commerzbank analysts said in a note.

Three rate hikes are priced in and there is a distinct risk this will move higher yet again, according to Commerzbank.

Ten-year U.S. Treasury yields were at 2.59 percent on Wednesday, close to the 2017 high of 2.63 percent.

Editing by Hugh Lawson

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