November 15, 2019 / 8:36 AM / a month ago

REFILE-A tale of two euro zone bond markets as core and periphery part ways

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

By Dhara Ranasinghe

LONDON, Nov 15 (Reuters) - Government borrowing costs in Germany and France were set for sizeable weekly declines, in contrast to southern European countries that have come under heavy selling pressure again this week.

Ten-year bond yields in higher-rated euro zone economies rose in early trade set on Friday after White House economic adviser Larry Kudlow said on Thursday that Washington was getting close to a trade agreement with China. That lifted investor confidence and hurt safe-haven assets.

Germany’s 10-year Bund yield was at -0.33%, off more than one-week lows hit on Thursday.

But it is down 8 bps on the week, set for the biggest weekly fall since mid-August. Dutch 10-year bond yields are down 7 bps this week, and French yields are 5 bps lower .

Analysts said a recent selloff in top-rated bonds had gone too far, given uncertainty about the direction of U.S./China trade talks, while data on Thursday signalled that world economic growth remains weak.

Bond yields in southern Europe, while lower on Friday, were set to end the week higher, a sign that sentiment towards the periphery has turned.

“In general, there has been risk aversion in recent days and a shift to core bond markets from the periphery,” said Daniel Lenz, a rates strategist at DZ Bank.

“That’s because investors are taking profits before year-end, but also because once Bunds get attractive, investors start to shift money away from periphery.”

Ten-year Italian bond yields were down 5 bps on the day at 1.38%, narrowing the gap over safer German Bund yields to 171 bps from around 173 bps the previous day, the widest since late August. But Italian yields are 11 bps higher on the week and set for a fourth straight week of rises.

Spain’s 10-year bond yield gap over Germany is at its widest since mid-September at 79 bps, reflecting concern that a possible coalition government of the Socialist and far-left Podemos parties will overspend.

After a rally in southern European bond markets this year, investors are locking in profits before year-end book closing, traders said. A growing sense that the European Central Bank is unlikely to deliver further stimulus soon has also soured sentiment towards peripheral debt markets.

“Volumes are very thin so every market movement is accentuated, but we are seeing a return to the past, with the peripheral countries - Italy but also Spain - which have become detached from the ‘core’ due to their internal political problems,” said Italian government bond trader.

Reporting by Dhara Ranasinghe; additional reporting by Valentina Za; editing by Larry King

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