Risk appetite sees German Bunds decline

City A.M. Reporter
GERMAN Bunds fell yesterday as Greek politicians backtracked on the call for a referendum on the latest bailout package, reducing the chances of a disorderly default, while an ECB rate cut took the market by surprise and improved the outlook for risk.

The yield spread of Italian and Spanish government bonds over German benchmarks narrowed slightly, as a sell-off in riskier assets eased.

The 2/10-year German bond yield curve steepened 10 basis points (bps) on the day to 150 bps after the ECB cut its key refinancing rate by 25 bps to 1.25 per cent, against a backdrop of deteriorating economic sentiment.

And yields on German 10-years spiked by 4.7 per cent, ending the day at 1.91 per cent.

The unravelling political chaos in Greece briefly dragged attention away from Italian and Spanish bonds. Yields have been nervously watched in recent weeks over fears of contagion spreading throughout Mediterranean Eurozone states.

Italian yields spiked in early trading yet eased to end the day narrowly up at 6.19 per cent. The country could start to run out of cash if yields surpass seven per cent. Rumours emanated from some traders that the European Central Bank (ECB) was buying up Italian bonds.

However, the ECB’s new Italian chief Mario Draghi offered no commitment to scale up the central bank’s bond buying programme, despite beginning his reign with an easing of policy.

The decision to cut interest rates “was seen as dangerous for Draghi ... as it would have enforced the image of the Italian trying to go for an inflationary policy. It will only enforce that sentiment in Germany, the Netherlands and Finland and other core countries,” said Peter Vanden Houte of ING Brussels.

Spanish yields rose by 0.7 per cent to reach 5.5 per cent.