Euro Zone Bond Yields Dip as Political Fears Ease in France and Italy

Euro zone bond yields fell on Wednesday, notably in France and Italy, as investors unwound political risk premiums ahead of French parliamentary elections. The gap between French and German yields narrowed, with French 10-year yields down 8 bps and Germany's 10-year yields down 5 bps. The election resulted in a hung parliament and market stabilization.

Euro zone bond yields fell on Wednesday, particularly in France and Italy, as investors began to unwind political risk premiums before the French parliamentary elections. The gap between French and German yields, a closely watched measure of French risk, fell to its lowest since June 13, at 63.5 basis points (bps).

France's 10-year bond yield dropped 8 bps to 3.176%, reversing the previous day's 9 bps rise. Yields and prices move inversely. Germany's 10-year bond yield also declined 5 bps to 2.531% after rising 4 bps on Tuesday.

Jussi Hiljanen, head of rates strategy at SEB, noted, "It's a continued correction of this sharp increase we saw at the end of June. Now it's normalising." Investor concerns about a possible far-right victory in France and high debt levels in Italy had driven yields higher.

The election ended in a hung parliament, with a surprisingly strong left bloc, calming market anxiety. Emmanouil Karimalis, rates strategist at UBS, commented, "I don't see any very strong catalyst. One day you sell off...but today there's nothing really negative." Markets await U.S. CPI data, a key inflation indicator, due on Thursday.

Italy's 10-year yield decreased by 9 bps to 3.863%, and the Italian-German yield gap narrowed by 6 bps to 133 bps. Richard McGuire, head of rates strategy at Rabobank, suggested that New Zealand's central bank signaling potential rate cuts and weak Chinese inflation data were also supporting bonds.

(With inputs from agencies.)