December 2, 2019 / 8:27 AM / 6 days ago

UPDATE 3-German SPD leadership choice pushes bond yields higher

(Adds latest news on Lagarde and updates prices)

By Saikat Chatterjee

LONDON, Dec 2 (Reuters) - Germany’s borrowing costs rose on Monday after the country’s Social Democrats chose new leaders critical of their own ruling coalition, with yields on benchmark 10-year debt set for the biggest one-day gain in nearly three months.

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

That could trigger instability at a time when the far-right Alternative for Germany is the third-largest party, or lead to increased spending by the German state if the coalition terms are renegotiated.

“In Germany we’ve had the speech (from Esken) where she wants a higher budget deficit, and second it’s clear that the coalition is coming to an end, so there is a political risk premium building in the bond markets,” said Francois Savary, CIO of Swiss wealth manager Prime Partners.

Benchmark German bond yields jumped, with 10-year yields up 8 basis points at -0.272%, their highest since Nov. 13. Monday’s rise was the biggest since mid-September.

The German curve steepened, with yields on 10- to 30-year debt rising around 9 bps.

“Whatever actually happens from here, this news will likely get markets excited about an easier path to more German fiscal policy in the future,” Deutsche Bank strategists said in a note.

A speech by the European Central Bank’s new president, Christine Lagarde, had no effect on euro zone debt. Markets were looking for clues on whether she would continue to ease the ECB’s monetary policy.

But Lagarde asked EU lawmakers on Monday to give her time to learn the ropes of her new job and reshape the ECB’s monetary policy. She has taken over at a difficult time for the ECB, which has recently resumed a 2.6 trillion-euro bond-buying programme and cut interest rates to record lows after failing to bring inflation back to its target of just below 2%.

The rise in yields rippled over to the broader European bond market. Italian 10-year yields rose nearly 10 bps to 1.434% . Spanish and Portuguese yields jumped to their highest since July.

Analysts said the spike in Italian yields was caused by investors shedding risk in their portfolios during the final month of the year and the high sensitivity of peripheral bonds to moves in core European debt such as German and French debt.

Investors are wary about the outlook for government debt in 2020, when net supply is expected to rise, pushing yields up. JP Morgan estimates about $460 billion of new supply next year, compared with demand for debt of about $400 billion in 2019.

Reporting by Saikat Chatterjee; Additional reporting by Sujata Rao; editing by Larry King

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