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European Bonds Benefit From German Coalition Deal

European Bonds Benefit From German Coalition Deal

Martin Essex, MSTA, Analyst

European bond talking points:

- News reports suggest an agreement has been reached to form a new coalition government in Germany.

- That is helping narrow the yield spreads between the sovereign bonds of countries like Italy, Spain and Portugal and German Bunds.

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German coalition deal agreed

A reported agreement Wednesday to form a new coalition government in Germany has narrowed the spreads – or differences in yield – between the higher-yielding government bonds of countries like Italy, Spain and Portugal and German Bunds.

Those reports suggest that not only have Chancellor Angela Merkel’s conservatives struck a deal with the center-left Social Democratic Party (SPD) but that the new finance minister will be the SPD’s Olaf Scholz, the mayor of Hamburg. As the SPD is seen as pro-European and pro-spending, sovereign bond yields – which move in the opposite direction to prices – have fallen in non-core EU countries while Bund yields have edged higher.

Spreads narrow between Italian and German bond yields

In Italy, for example, the 10-year government bond yield fell 4.5 basis points while the yield on the 10-year German Bund was up by nearly one basis point, narrowing the spread between them to less than 125 basis points.

Italian 10-year spread over Germany

Chart by Thomson Reuters

So far, there has been little response to the reported deal in either the Euro or German stocks, which have been largely following Wall Street. However, as reported yesterday, the Euro is likely to benefit from a German coalition agreement in the longer term.

--- Written by Martin Essex, Analyst and Editor

To contact Martin, email him at martin.essex@ig.com

Follow Martin on Twitter @MartinSEssex

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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