Europe’s Higher-Yielding Government Bonds Halt Last Week’s Rally

  • Spain’s two-, 10-year yields reached record lows on Friday
  • Trading is thin on U.S. Independence Day vacation: DZ’s Lenz

Europe’s higher-yielding government bonds took a breather from a week-long rally that sent yields on Italian 10-year debt to the lowest in more than a year and those on Spanish securities tumbling to records.

Spain’s 10-year debt halted five straight days of gains in patchy trading during the U.S.’s Fourth of July vacation, while similar-maturity Italian bonds fell for the first time since Brexit-results day.

The longer-term Spanish debt just posted its best week since 2012 amid speculation the nation would be among the main beneficiaries of any European Central Bank plan to loosen its rules on quantitative easing. Both its two- and 10-year yields touched all-time lows Friday -- also helped by acting Prime Minister Mariano Rajoy consolidating his position in the nation’s elections.

“Seems like that there’s a new balance within the market after the chaos,” said Daniel Lenz, a market strategist at DZ Bank AG in Frankfurt. “Across the board, there’s profit-taking at the moment. The momentum that the periphery had due to the ECB speculation is gone now.”

The yield on Italy’s 10-year bonds rose one basis point, or 0.01 percentage point to 1.24 percent, as of 4:45 p.m. London time, having reached 1.15 percent on Friday, the lowest since March 2015. The 1.6 percent security due June 2026 fell 0.135, or 1.35 euros per 1,000-euro ($1,114) face amount, to 103.34.

Spain’s 10-year bond yield was little changed at 1.15 percent, after touching a record-low 1.047 percent on Friday.

The U.S. holiday is leading to “rather thin volumes,” Lenz said, while continuing political developments in the U.K. following the vote to leave the European Union, and in Spain, mean there’s still “more risk, especially for the periphery, to the downside in terms of bond prices.”

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