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Lower-rated euro zone bonds suffer as cracks widen between Europe and U.S.
May 29, 2017 / 8:35 AM / 3 months ago

Lower-rated euro zone bonds suffer as cracks widen between Europe and U.S.

* Concerns over Europe-U.S. relations makes for jittery open

* South European bonds underperform in risk-off euro zone market

* Draghi speech could hint at stance for June ECB meeting

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

By Abhinav Ramnarayan

LONDON, May 29 (Reuters) - Lower-rated southern European government bond prices fell on Monday after German Chancellor Angela Merkel warned of worsening relations between Europe and some of its allies, in particular the United States and Britain.

Merkel said on Sunday that Europe could no longer completely rely on some nations, pointing to bruising meetings of the G7 wealthy nations and NATO last week.

Concerns over trade among developed markets have increased over the past year after the UK voted to leave the European Union last June and Republican Donald Trump became U.S. President in November, partly on a protectionist agenda.

These issues resurfaced at a two-day summit of the G7 group of some of the world's largest economies.

"Merkel's comments point to political woes. It is something which investors have to digest," said DZ Bank strategist Daniel Lenz.

"It is a slightly risk-off mode this morning but again it is thin trading today so you could see this change very quickly," he said, referring to the fact that U.S. and British investors are on holiday.

Italian, Spanish and Portuguese government bond yields rose 3-5 basis points on Monday morning, underperforming other countries in the bloc.

The German equivalent, on the other hand, was largely unchanged; a combination that often points to a "risk off" or a nervous mood in the market.

The spread between German and U.S. 10-year borrowing costs was at 191.5 bps, close to a two-week high of 192 basis points hit on Friday on increased concerns over the world's largest economy.

"The main reason for that is there are concerns about whether Trump will push forward with his spending and tax plans, with all these investigations going on," said Lenz.

Trump has faced several accusations of collusion with Russia and attacked the news media on Sunday following reports his son-in-law tried to set up a secret channel of communications with Moscow before Trump took office.

In Europe, the economic picture is more positive, though yields on Germany's 10-year bond have fallen in recent weeks as policy makers have played down the possibility of a sharp shift from the current ultra-loose monetary policy stance.

Further hints as to what the European Central Bank will do when it meets next month could emerge when the region's top policymaker, Mario Draghi, speaks to European Parliament later on Monday, at 1500 CET.

"This week will bring final guidance for the key ECB meeting in June. With core inflation slipping back below 1 percent and ECB members sounding increasingly tired of QE, we ... expect spreads to stay uneven," Commerzbank analysts said in a note.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets

Reporting by Abhinav Ramnarayan; Editing by Hugh Lawson

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