October 15, 2018 / 7:54 AM / a month ago

Bid for German Bunds boosted by Brexit, budgets and bad relations

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

By Virginia Furness

LONDON, Oct 15 (Reuters) - Euro zone bond yields felt downward pressure on Monday as investors moved into less risky assets on lingering risk-events such as U.S.-Saudi tensions, Italy’s budget and a lack of progress in Brexit talks.

German government bond yields remained close to two-week lows after a strong performance following a shaky start for global equity markets, with analysts citing a plethora of global risks as the drivers of sentiment. This included a state election in Bavaria at the weekend which delivered humiliating results for parties in Chancellor Angela Merkel’s coalition government.

Escalating tensions between the United States and Saudi Arabia over the disappearance of Washington Post journalist Jamal Khashoggi, a stall in Brexit talks over the weekend, and concerns over Italy’s budget helped boost the bid for Bunds.

This added to gains made on Friday after comments by European Central Bank chief Mario Draghi, tempering the euro zone’s inflation outlook.

Germany’s 10-year bond yield, the benchmark for the region, was last at 0.489 percent, opened decisively below 0.5 percent at 0.48 percent, it’s lowest level in almost two-weeks, having last week recorded its strongest performance since August. .

The disastrous state election for Merkel’s Bavarian allies did little to derail the bid either.

“This reflects the ongoing lack of trust and likeablity of the grand coalition (but) we need to see how that is reflected in Berlin,” said Christian Lenk, rates strategist at DZ Bank. “The safe haven character (of Bunds) is the dominant moving part.”

Elsewhere, Portugal’s rating were upgraded on Friday by Moody’s though this failed to give any significant boost to bond yields which remained pinned near five month highs.

Portugal’s government bond yields opened around flat to one basis point lower on Monday with its five year yield at 0.86 percent, and its 10-year yield at 2.02 percent, .

Moody’s became the last of the big three ratings agencies since the euro zone bond crisis to lift Portugal from junk status. Moody’s upgraded Portugal to Baa3 from Ba1.

While the move is unlikely to unlock fresh flows of capital as Portugal is already part of the largest investment grade indexes, it may help convince those investors who take a more stringent view.

“Some investors take a fairly conservative view and if the worst of the (ratings) improves, that may encourage them to come back in,” said Antoine Bouvet, rates strategist at Mizuho.

Portugal is rated BBB by both Standard & Poor’s and Fitch.

Lower bond yields were seen across the euro zone, with even Italian bond yields lower ahead of a cabinet meeting to approve the controversial 2019 budget later on.

Horse-trading between Italy and international bodies such as the European Union and the International Monetary Fund continued over the weekend. But markets appear soothed after Italy’s Deputy Prime Minister Luigi Di Maio on Sunday ruled out that the government could take the country out of the euro zone, saying such talk was no more than scaremongering by its political opponents.

Italy should abide by European budget rules and must settle its differences with Brussels over higher state spending in talks with the European Union’s executive, a senior International Monetary Fund official was quoted on Sunday as saying.

Italy’s five year government bond yield was down eight basis points to 2.98 percent, with its 10-year three basis points lower at 3.55 percent,.

Reporting by Virginia Furness; Editing by Toby Chopra

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