December 3, 2019 / 8:24 AM / 11 days ago

German bond yields at three-week highs despite trade tensions

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

LONDON, Dec 3 (Reuters) - European government bonds yields edged higher on Tuesday, with yields on benchmark German debt rising to a three-week high as the prospect of political uncertainty in Germany prompted investors to sell bonds for a second consecutive day.

The election on Saturday of Norbert Walter-Borjans and Saskia Esken for the country’s Social Democrats raised the chances of an early election or minority government if the SPD leaves Germany’s coalition government.

The tone in markets was risk-off after U.S. President Donald Trump announced tariffs on U.S. steel and aluminium imports from Brazil and Argentina, but bond traders in Europe remained focused on the weekend political developments in Germany, the euro zone’s biggest bond market.

“It is a bit of a mixed bag today, especially given the renewed trade tensions overnight, but the overnight selloff in European bonds is still having an effect,” said Benjamin Schroeder, a rates strategist at ING.

In China, Global Times, a tabloid published by the Chinese Communist Party’s official newspaper, the People’s Daily, tweeted on Tuesday that Beijing would soon release its so-called unreliable-entities list, imposing sanctions against those who harm China’s interests.

In early trading on Tuesday, yields on benchmark German 10-year debt rose 1 basis point to -0.26%, its highest since Nov. 13, up more than 8 bps from Friday’s close.

Yields on peripheral bonds such as Italian 10-year debt were also higher at 1.45%.

Traders said the move higher in bond yields was due to investors reducing their holdings of longer-maturity debt into the holidays.

The move higher in German yields over the past two sessions has narrowed the spread between German and U.S. benchmark yields to near its lowest since February 2018.

Though overnight reports showed U.S. factory activity and construction spending declined unexpectedly, investors were wary of pushing yields lower.

“After such a move higher in yields, there is the risk of some slight retracement today, but we think the underlying trend should be one of investors being reluctant to put on fresh long positioning at this stage in the year, and generally being cautious on risk,” Mizuho strategists said in a note. (Reporting by Saikat Chatterjee, editing by Larry King)

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