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UPDATE 2-Euro zone yields fall as Dutch vote in key political test
March 15, 2017 / 11:54 AM / 8 months ago

UPDATE 2-Euro zone yields fall as Dutch vote in key political test

* Euro zone bond yields fall broadly

* Dutch vote in first political test of 2017

* Investors watch for signals from U.S. policymakers

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updated throughout)

By Abhinav Ramnarayan and John Geddie

LONDON, March 15 (Reuters) - Euro zone government bond yields fell broadly on Wednesday as voters in the Netherlands gave the bloc its first big political test of the year.

In what analysts described as volatile trading in thin volume, yields fell faster on government debt seen as higher-risk than on safe-haven German bonds, suggesting concerns around the vote were easing.

But market moves were muddied by uncertainty over what signals the U.S. Federal Reserve will give for the future direction of rates after it delivers a widely-expected rate hike later on Wednesday.

The Dutch election is seen as a test of anti-establishment and anti-EU sentiment in the currency bloc before votes later this year in France, Germany, and possibly Italy, the biggest economies in the euro zone.

Polls showed voter turnout was far higher than five years ago, a trend which could favour Prime Minister Mark Rutte’s centre-right VVD party over the PVV (Party for Freedom) of anti-Islam, anti-EU firebrand Geert Wilders. The latest opinion polls put the VVD party ahead of the PVV by 3 percentage points.

“The spread tightening could suggest some investors see a high turnout as potentially supporting the established party but there seems to be a lot of confusion around how to trade this event,” Rabobank strategist Matt Cairns said.

German 10-year bond yields -- the bloc’s benchmark -- were 4 basis points lower on the day at 0.42 percent as European trading drew to a close.

Dutch equivalents were down 5 bps at 0.51 percent .

In Italy and France, countries seen as most vulnerable to a populist wave sweeping Europe, yields fell as much as 6 bps and closed the gap with German equivalents.

HIKE LOOMS

Euro zone bond yields fell despite the almost nailed-on certainty of a rate hike in the United States later on Wednesday.

In addition to the hike itself, investors will be keeping a close eye on whether U.S. policymakers signal a tighter line 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.

Germany’s Finance Agency, the federal government’s debt management office, sold 0.816 billion euros in a top up of its 2.50 percent, 30-year Bund at the lowest price of 132.53, the Bundesbank said on Wednesday.

Editing by Alison Williams/Ruth Pitchford

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