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Narrowing German election race nudges euro zone bond yields up
February 3, 2017 / 9:57 AM / 10 months ago

Narrowing German election race nudges euro zone bond yields up

* Poll shows Socialists closing gap on Merkel’s bloc

* Analysts say could result in more fiscal pledges

* Right-wing AFD seen losing support

* Euro zone periphery yields

By John Geddie

LONDON, Feb 3 (Reuters) - Investors sold euro zone government bonds on Friday after a poll showed Germany’s election race narrowing, which could signal fiscal stimulus in the bloc’s biggest economy and less support for right-wing populists.

The poll late Thursday showed support for Germany’s centre-left Social Democratic Party (SPD) jumped to its highest since the last federal election in 2013, closing the gap on Chancellor Angela Merkel’s conservative CDU/CSU bloc.

Meanwhile, support for the right-wing Alternative for Germany (AfD) party dropped.

Analysts said pressure from the left made it more likely that politicians in Germany, one of the main proponents of austerity that some argue has held back the bloc’s recovery, may shift towards fiscal stimulus that would boost growth and inflation.

Higher inflation erodes the value of bonds, while better growth prospects encourage investors to shift into riskier assets like equities.

“If we believe there is a serious fight then the only outcome is a looser fiscal policy in Germany because either a new left-leaning government is going to spend money or Merkel has to promise a lot of sweeties to the electorate to stay in power,” RBC’s global macro strategist Peter Schaffrik said.

German 10-year yields DE10YT-TWEB edged up 2 basis points to 0.45 percent, recovering from a one-week low hit on Thursday after the U.S. Federal Reserve and the Bank of England signalled they were in no rush to tighten monetary policy.

Most other euro zone yields - which move inversely to prices - were up around 2-3 basis points. Germany’s main stock index rose slightly on Friday, in line with other bourses.

The SPD has been reinvigorated by the nomination of Martin Schulz as its chancellor candidate.

In a theoretical direct vote, the poll showed Schulz would beat Merkel, who has reined over the bloc’s largest economy for more than a decade.

While the elections in Germany will not be held until September - and investors will have to navigate knife-edge vote in the Netherlands, France and possibly Italy before then - some analysts said signals that the anti-establishment AFD was losing support had provided optimism for markets.

“One interpretation is that it squeezes out AFD because you have two mainstream heavyweights now, so if you are looking for an alternative to Merkel then some of that protest vote will be absorbed by Schulz,” Rabobank’s head of rates strategy Richard McGuire said.

Investors were also awaiting U.S. jobs data at 1330 GMT that could influence the future path of U.S. policy rates and exert more upward pressure on yields. Economists polled by Reuters expect employers to have added 175,000 jobs in January.

The U.S. central bank’s meeting on Wednesday was viewed as more dovish than expected after it said job gains remained solid, inflation had increased and economic confidence was rising, but gave no firm signal on the timing of its next rate move.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url= (Editing by Tom Heneghan)

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