Peripheral European Government bond yields decline – Interactive Data

With the US markets focussed on the government debt ceiling debate and related government shutdown between October 1 and October 16, there turned out to be a relatively benign impact on global financial markets and there were notable gains on the month in some EMEA markets, Interactive Data report reveals.

Core European government bonds followed a similar trend to US government securities, with the German 10yr benchmark bond yield rising at the start of the month from 1.78% to 1.94% on 16 October, the day of the US debt limit extension agreement, before declining to 1.69% at the end of the month, Interactive Data’s latest Fixed Income report revealed.

The French 10yr government benchmark bond yield dropped 16bp on the month to 2.25% having peaked at 2.51% on 16 October.

Economic data from across the eurozone was mixed in October. PMI data was generally weaker than expected and the French unemployment rate for September reached 11%, a 16 year high. Meanwhile Germany’s unemployment rate dropped by 0.1% on the month to 6.5% and the Finance Ministry raised its 2014 GDP growth forecast to 1.7%. Both Spain and Portugal posted a 0.1% quarterly increase in Q3 GDP and there was also a drop in unemployment in Spain from 26.3% in Q2 to 26% in Q3. However, there was less optimistic news from Italy where the national statistics office said Q3 GDP is likely to have contracted, the report also showed.

At the end of October, Eurostat issued a flash October inflation rate for the Eurozone at 0.7%, down from 1.1% in September. With low inflation, a strengthening euro, weak domestic demand and a fragile recovery across Europe, there were growing expectations of a 25 bp interest rate cut by the ECB, to 0.25% on 07 November.

Peripheral government bond yields saw significant declines on the month. The Spanish 10 year benchmark bond yield dropped 26 bp from 4.31% to 4.05% and the Italian 10 year benchmark bond fell 45 bp from 4.32% to 3.87%. The Portuguese 10 year benchmark bond yield declined by 60bp, to 6.20%.

In Portugal, representatives from the Troika (the International Monetary Fund, the European Commission and the European Central Bank) approved the economic progress being made in the country. Next year’s budget shows further heavy public sector spending cuts with the government aiming to exit the €78bn bailout program by mid-2014.

Meanwhile, the Irish prime minister said the government was adamant to become the first eurozone country to leave the international bailout program as planned, in December 2013. Yields on the March 2023 government bond dropped from 3.89% to 3.49% on the month.

There was continued positive data released for the UK economy with Q3 GDP rising 0.8% on quarter, after 0.7% growth in Q2. The UK 10yr government benchmark bond yield declined 10bp to 2.63% on the month. The government also announced plans to issue its first sukuk issue – a bond compliant with Islamic law.

European corporate bonds were also higher in October with spreads tightening throughout the month and notable drops seen in benchmark credit indices. Data provided by Interactive Data’s CDS Evaluations Service shows the iTraxxTM Europe 5yr dropped 20bp to 75bp and the iTraxx Crossover 5yr by 84bp to 299bp. Financial sector indices were also lower on the month with the iTraxx Senior Financials 5yr down 30bp to 104bp and the iTraxx Sub Financials 5yr 33bp lower at 165bp.

EDF has been granted a contract to build UK’s first nuclear power station since 1995 which will cost £16.5bn, 65% financed with debt. Details of the debt structure is to be determined.. Levels on EDF’s EUR 2023 bond rose from 100.43 to 101.57, with the yield down 14bp to 2.56%.

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