November 12, 2019 / 11:53 AM / a month ago

UPDATE 2-Spanish bond yields near 4-month highs on coalition concerns

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Recasts, adds details)

By Olga Cotaga

LONDON, Nov 12 (Reuters) - Spanish government bond yields rose to near four-month highs on Tuesday after the country’s Socialist party reached a preliminary coalition deal with the far-left Unidas Podemos following an inconclusive election on Sunday.

“The political situation is not going to be very helpful from a bond perspective as the parties are not perceived to be very market friendly and we expect a gradual steepening in the bond yield curve,” said Henry Occleston, a London-based rates strategist at Mizuho Bank.

Yields on benchmark 10-year Spanish government debt rose three basis points to 0.45%. Spreads over comparable French debt widened to a one-month high of around 40 bps.

The unexpectedly fast preliminary agreement between two Spanish parties which recently refused to work together would require further steps including bringing in smaller parties and agreeing cabinet positions.

Acting prime minister Pedro Sanchez’s gamble on holding the country’s second election this year resulted in no clear winner but a surge for the far right on Sunday.

Elsewhere on treasury markets, German bond yields held firm after better-than-expected German Zew investor sentiment survey data.

German Bund yields were around 1 basis point higher at -0.243%, close to a five-month high of -0.218% reached last week as investors shifted their long positions on German Bunds into short positions, according to Jefferies analysts.

The ZEW survey showed the mood among German investors had improved more than expected, due partly to recent developments in trade conflicts, although this had little immediate impact on bond prices.

“We continue to have a small bearish bias in Bunds, despite yields close to our fair value estimate of -30 bps,” said Mohit Kumar, managing director at Jefferies.

“The macro environment is positive for risky assets with positive developments on the U.S.-China trade war and our expectation that economic data as well as inflation prints (data) should start picking up,” Kumar said.

Meanwhile, Italian government bonds outperformed, with the 10-year benchmark down 4 bps on the day after a hefty selloff on Monday that saw the yield rise 7 bps.

“In Italy, investor position is still long,” said Kumar.

Italy, in particular, and to a lesser extent Spain and Portugal, have borne the brunt of selling in recent sessions as analysts say investors are taking profit after a stellar rally in those bond markets this year..

Reporting by Olga Cotaga; Additional reporting by Saikat Chatterjee; Editing by Kirsten Donovan, Alex Richardson and Philippa Fletcher

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