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UPDATE 1-Weak data lifts euro zone bonds, Spanish market brushes off election threat

Updated: 13-02-2019 18:03 IST
UPDATE 1-Weak data lifts euro zone bonds, Spanish market brushes off election threat

Euro zone bond yields fell on Wednesday after data showed a larger-than-expected drop in industrial production in the bloc, while the Spanish bond market held firm after parliament voted to reject its 2019 budget. Further evidence of slowing growth in the euro zone pushed long-term market inflation expectations to new lows, while putting downward pressure on bloc bond yields.

The European Union's statistics office Eurostat said industrial output in the 19-country currency union fell 0.9 percent month-on-month for a 4.2 percent year-on-year decline. Germany's 10-year government bond yield, the benchmark for the region, fell to as low as 0.119 percent, while other core 10-year bond yields were down around one and a half basis points.

The market also lowered its long-term inflation expectations with the five-year, five-year forward touching a new low of 1.4459 percent. Italian government bond yields fell the most and were down up to six basis points across the curve., ,.

Spanish bond yields were largely unmoved after Spain's parliament rejected the socialist government's 2019 budget proposal on Wednesday, Prime Minister Pedro Sanchez's first major legislative defeat. The rejection raised the chances the government will call a snap general election.

"Let's assume we go to elections from here. It's not the worst thing for Spain because, judging by the polls, we will get a working agreement between right-wing parties," said Lyn Graham-Taylor, fixed income strategist at Rabobank. "At the moment Spain has no working government and obviously the market doesn't like uncertainty, but you can see why Spanish yields are largely flat on the day."

The spread of 10-year Spanish debt over top-rated Germany briefly widened to 111.1 basis points. Spanish 10-year government bond yields rose around one basis point and were last at 1.25 percent.

Natixis rates strategist Jean-Christophe Machado said the limited price moves suggest investors are more concerned with Brexit developments and newsflow out of Italy. "The fact that Italy is in a bad position has given Spain a boost," he said. "If you want to be diversified, you go for Spain. The Spanish bond didn't blink with the BTP (Italian yield) widening."

However, Machado said Spanish bonds were in the longer term vulnerable in the face of further negative developments in both BTPs and Brexit. "If we had a huge sell-off in Italy and Brexit went badly, Spanish bonds would suffer," he said.

Italian government bond yields have blown out since the end of January on growth concerns, as well as the possibility of early national elections there. (Reporting by Virginia Furness; editing by John Stonestreet and Jan Harvey)