February 26, 2019 / 9:12 AM / 8 months ago

UPDATE 3-French bond yields at lowest since Nov 2016 as "yellow vest" effect wanes

* French 10-year yield drops to lowest since Nov 2016

* French consumer confidence at pre-protest levels

* Peripheral yields drop as Spain 15-yr sale flies

* Fed’s Powell to testify to Senate

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates with US data, Spain bond deal details, Greek issue)

By Abhinav Ramnarayan

LONDON, Feb 26 (Reuters) - France’s 10-year government bond yield dropped to its lowest since November 2016 on Tuesday as the effect of the “yellow vest” protests faded.

Other high-grade euro zone bond yields were a tad higher by late trade, following strong U.S. consumer confidence data. But Southern European bond yields dropped sharply on storming demand for Spain’s 15-year syndicated bond deal.

A survey showed that French consumer confidence jumped in February to its highest since the protests began, as unemployment fears receded, reinforcing last week’s strong purchasing managers’ index.

In addition, support for the “yellow vest” movement is waning, and French President Emmanuel Macron’s popularity has recovered to levels not seen since the protests broke out in mid-November, a poll showed this week.

“What markets are starting to realise is that Macron seems to be quite stable in his saddle now and the ‘yellow vest’ effect is starting to fade,” said DZ Bank rates strategist Christian Lenk.

“The move (in French yields) is also in line with the idea that investors are looking for a pick-up with Bund yields so low, and the French curve at the long end in particular seems to be quite attractive.”

France’s 10-year bond yield fell 2 basis points to 0.505 percent, the lowest in 27 months. It was steady in late trade at around 0.53 percent, still outperforming most other higher rated euro zone bonds.

Last week, France sold 7 billion euros of 30-year bonds, getting orders for more than five times that amount.

“There seems to be some stabilisation: the phase where activity deteriorates might be over, giving hopes to the market the effect of the protests might fade,” Mizuho strategist Antoine Bouvet said.

“But we should remember these are sentiment indicators, which tend to recover quickly, not hard data. So I would be a little cautious.”

Bond markets in the currency bloc showed little immediate reaction to a testimony from U.S. Federal Reserve chair Jerome Powell. The Fed chief reiterated that the central bank will remain “patient” when deciding on further rate hikes.


Elsewhere, Southern European bonds rallied as Spain generated storming demand for a 15-year bond sale, with order books exceeding 44 billion euros, according to International Financing Review.

Spain’s outstanding 10-year bond yield dropped to a 28-month low of 1.126 percent, pulling Italian and Portuguese equivalents lower too.

Italian bond yields were down as much as 8 bps , while Greek bond yields also fell sharply.

Greece may attempt a second bond sale next month, its second since it emerged from an international bailout programme last August, sources close to the matter said.

“The Spanish syndication is improving sentiment and causing the out performance of peripheral debt,” Natixis rates strategist Jean-Christophe Machado said.

Greek 10-year bond yields fell to 3.712 percent, their lowest level in just over a year.

Reporting by Abhinav Ramnarayan; Additional reporting by Dhara Ranasinghe; Editing by Hugh Lawson

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