May 16, 2017 / 11:16 AM / 10 months ago

Southern European bond spreads tighten sharply on brighter economic, political prospects

LONDON, May 16 (Reuters) - The premium investors demand for holding lower-rated southern European bonds over top-rated German peers fell sharply on Tuesday, in a sign of growing confidence in the bloc’s economic and political outlook.

Bond yields in Italy, Spain and Portugal all fell 4-5 basis points each , with sentiment buoyed by talks between the bloc’s main powers, Germany and France, which may open the door to changing treaties to facilitate ambitious reform.

A robust first quarter growth report for the bloc gave a further boost.

The gap between 10-year Italian and German bond yields dropped below 180 basis points for the first time in a week and was down from 185 bps on Monday. The Portuguese/German 10-year yield spread fell below 300 bps to its tightest level since August.

“There is risk on sentiment, thanks to solid economic indicators,” said Sebastian Fellechner, a rates strategist at DZ Bank. “Political risks have also faded and (French President Emmanuel) Macron’s visit to Berlin is also contributing to the move.” (Reporting by Dhara Ranasinghe, Editing by Abhinav Ramnarayan)

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