Belgian, French bonds near 2018 lows as safety bid expands
Belgian and French borrowing costs are close to their lowest levels this year and the spread over Germany is tightening as investors battle to find safe assets in the face of economic and global trade concerns.
Belgian and French borrowing costs are very close to their lowest levels this year. Also, the spread over Germany is tightening as investors battle to find safe assets in the face of economic and global trade concerns.
Although the prospect of a trade war between the United States and China eased a touch on Friday, worries over slowing growth in Europe and cautious comments from European policymakers on future rate hikes, have kept yields compressed in the block.
With German 10-year Bund yields persistently around the 0.30 per cent mark -- less than half the level earlier this year -- investors have no choice but to go down the credit spectrum.
But the recent Italian bond selloff has kept them from investing too much in low-rated Southern European debt and as a result, countries such as France, Belgium and to an extent Ireland, have benefited.
Belgium's 10-year government bond yield was 3 basis points lower on Friday and only a shade above its lowest level since early January at 0.66 per cent, while the spread over Germany was at its tightest in four weeks at 37 bps.
French and Irish 10-year borrowing costs are also close to their lowest levels this year so far at 0.64 per cent and 0.83 percent respectively.
"Spreads have a tendency to tighten when rates move lower, as some investors who need yield can buy assets such as French debt to get a pick up compared to Germany," said Mizuho strategist Antoine Bouvet.
"The semi-core has the benefit that it doesn't have the political risk of Italy," he added. The phrase 'semi-core' is used to describe countries such as France and Belgium that are just below "core" euro zone members Germany and the Netherlands in the credit ratings spectrum.
That said, Southern European debt did receive some demand on Friday, with Italian 10-year yields dropping 2.5 bps to 2.616 percent and the closely-watched Italy/Germany bond yield spread was at its tightest in over a week at 232 bps.
Spanish and Portuguese yields were also about a basis point lower on the day as risk sentiment improved and stock markets strengthened, with the U.S. Treasury Secretary Steven Mnuchin saying the U.S. and China could reopen talks on trade.
But they are well above the year's lows, hit in March and April, before the arrival in government of a coalition of anti-establishment parties in Italy hurt the debt of all three countries. (Reporting by Abhinav Ramnarayan; Editing by Jon Boyle)
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