Article Highlights

  • Bond yields creep up for third day
  • Sentiment turns bearish
  • Italy politics in spotlight
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Borrowing costs in the euro area edged higher for a third straight day on Tuesday, pushed up by surging oil prices, rising U.S. government bond yields and perceived hawkish comments this week from a European Central Bank official.

Germany’s 10-year bond yield jumped 6 basis points on Monday, extending that rise on Tuesday to its highest in almost three weeks at 0.63 percent.

Long-dated bond yields in Italy briefly rose to their highest in almost two months before falling back.

Bank of France Governor Francois Villeroy de Galhau said on Monday the ECB could give fresh guidance on the timing of its first rate hike as the end of its exceptional bond purchases approaches.

Those comments, along with easing concerns about a global trade war and a rise in oil prices to 3-1/2 year highs, have put renewed upward pressure on U.S. and European government bondyields.

The U.S. 10-year Treasury yield traded above the 3 percent barrier in European trade.

“We have this Galhau interview and he was very much pointing to rate hikes after the end of QE (quantitative easing),” said DZ Bank rates strategist Daniel Lenz, explaining the weakness in euro zone debt markets. “And we still have a high oil price and U.S. Treasury yields above 3 percent.”

Most 10-year bond yields in the euro zone were up 1-2 basis points. But a repeat of Monday’s sharp sell off was perhaps avoided after news that powerhouse economy Germany slowed slightly more than expected in the first quarter of the year.

In Italy, investors awaited the outcome of coalition talks between the anti-establishment 5-Star Movement and far-right League, which won more time on Monday to form a government.

The prospect of a tie-up between two parties committed to big-spending policies has put upward pressure on Italian bond yields in the past week.

But the fact that 5-Star and the League need more time to reach an agreement appears to have given some comfort to bond investors.

Italy’s 10-year bond yield gap over top-rated Germany was at its tightest in almost a week at around 127 bps.

That closely-watched spread remains around 12 bps below levels seen just before Italy’s inconclusive March 4 election.

“The (5-Star/League) program sketched out so far has raised fears of increasing deficits, but the impact on the BTP/Bund spread has been muted thus far,” ING said in a note.