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Politics, policy risk cap euro zone bond yields
May 26, 2017 / 8:53 AM / 4 months ago

Politics, policy risk cap euro zone bond yields

* Investors take cue from policymakers, stay cautious on recovery

* German bond yields remain well below recent highs at 0.36 pct

* Political hurdles remain after French presidential election

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

By Abhinav Ramnarayan

LONDON, May 26 (Reuters) - Looming political and policy risks kept euro zone government bond yields close to recent lows on Friday, keeping investors from putting too much faith in improved economic data.

Despite a market-friendly result in the French presidential election and strong inflation and private sector numbers coming out of the bloc recently, most euro zone bond yields are trading well below recent highs.

Germany’s 10-year government bond yield, the benchmark for the region, fell 1 basis point to 0.36 percent -- comfortably above the 0.20 percent level at the start of the year but well below the March high of 0.51 percent. Other euro zone yields also edged lower on the day.

Investors were taking their cue from policymakers and staying cautious on the brightening political and economic picture in Europe and its implications for monetary policy.

“We have had a few positive political outcomes, but we still have Brexit negotiations to come, Italian and German elections, a potential Catalonia referendum and the unpredictable factor of Donald Trump’s presidency,” ING strategist Padhraic Garvey said.

“So even though we are moving towards higher rates in the U.S. and tapering in Europe, in general policymakers are being very careful.”

This was underlined this week when top European Central Bank officials made it clear they would not favour changing the policy path they had already set forward.

Analysts said policymakers’ recent cautious had soothed bond investors and pulled yields back from levels hit earlier this week.

A survey showed this week that businesses across the euro zone maintained April’s blistering growth rate in May, pointing to 0.7 percent of economic growth in the second quarter of the year.

“Certainly this is a positive assessments if the way the euro zone economy is heading, but you could say the surveys are running ahead of the hard data,” said Investec economist Philip Shaw. “There is still a degree of scepticism.”

A poll on voting intentions in next month’s British general election pushed the euro to a two-month high against sterling , possibly keeping a lid on euro zone bond yields.

Sterling dived more than half a percent against both the dollar and euro after an opinion poll two weeks before the vote showed Prime Minister Theresa May’s lead over the main opposition Labour Party down to just 5 percentage points.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets

Reporting by Abhinav Ramnarayan; Editing by Angus MacSwan

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