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Euro zone bond markets batten down for Dutch election test
March 13, 2017 / 8:58 AM / 8 months ago

Euro zone bond markets batten down for Dutch election test

* Bonds recover ground after Friday’s sharp sell-off

* Focus on Wednesday’s Dutch parliamentary election, Fed meeting

* Election seen as litmus test of populism in Europe

* Spate of ECB speakers awaited on Monday

* Euro zone periphery govt bond yields

By Dhara Ranasinghe

LONDON, March 13 (Reuters) - Euro zone government bond yields pulled back from multi-week highs on Monday, as nervous investors turned their focus to this week’s Dutch parliamentary elections -- the next key gauge of populism in Europe.

Bond markets sold off heavily on Friday on news that some European Central Bank policymakers had discussed the possibility of lifting interest rates before ending quantitative easing.

But the week began with a calmer tone, with investors reluctant to dump safe-haven bonds just ahead of Wednesday’s closely-watched election in the Netherlands as well as a U.S. Federal Reserve meeting that is tipped to end with a rate hike.

The Dutch vote is viewed as a barometer of voter sentiment in a big European economy after last year’s Brexit vote and unexpected U.S. presidential election results roiled markets.

Polls suggest the far-right ticket will double its vote and its results could affect investor perceptions’ on coming elections in France and Germany this year.

Anti-EU nationalist Geert Wilders, running almost neck-and-neck with conservative Prime Minister Mark Rutte, stands to double his seat total in parliament while the two coalition parties’ share is cut almost in half.

Although the risk of a eurosceptic party coming to power in the Netherlands is small, a strong election performance could renew concerns about the popularity of the far-right in French presidential elections in April and May, said Erin Browne, head of macro investments at UBS O‘Connor, a hedge fund manager within UBS Asset Management.

“If you see a eurosceptic party gains a significantly larger share of the vote than current polls suggest that could spill over into concern about the French elections and the National Front doing better in the second round of voting than is currently being predicted,” she said. “That’s the risk for markets with a view to the Dutch elections.”

Top-rated Dutch bonds have been resilient to domestic political risks -- partly because mainstream Dutch parties have ruled out forming a government with Wilders’ Freedom Party. In contrast, French bonds have taken a beating this year from French election nerves.

Indeed, Dutch bond markets showed little reaction to a diplomatic confrontation between the Netherlands and Turkey after two major incidents on Saturday.

ABN AMRO fixed income strategist Kim Liu said that the anti-Islam Freedom Party as well as Rutte’s conservative VVD party could benefit from the weekend developments.

Dutch 10-year bond yields fell 2 basis points on Monday to 0.56 percent, down from one-month highs. The gap over benchmark German 10-year Bund yields was around 9 bps and not far off the tightest levels since last April.

Other euro zone bond yields were down 2-4 bps on the day, with German Bund yields down from five-week highs.

A number of ECB policy makers, including ECB chief Mario Draghi, are expected to speak on Monday. The ECB last week signalled a diminishing urgency for more policy action and highlighted an improving economic outlook.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=

Reporting by Dhara Ranasinghe; Editing by Toby Chopra

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