Euro zone bond yields rose across the board on Tuesday as a lack of progress in forming a government in the Netherlands and the risk of snap elections in Finland put a damper on political optimism around Europe. On Monday, euro zone government bond yields dropped as the first round of French parliamentary elections pointed to a landslide for President Emmanuel Macron’s party while Italy’s anti-establishment 5-Star Movement suffered in mayoral elections. But while political risks may have diminished in southern Europe, political uncertainty persists in some countries in the north.
“We have had some major political news in Europe in the last few days, and though the French and Italian news has been much more in focus, we also have some negative news from other parts,” said DZ Bank strategist Daniel Lenz. “In the Netherlands, the second attempt to build a coalition failed and in Finland there is a possibility of snap elections.” Euro zone bond yields rose 1-2 basis points across the board on Tuesday. The yield on Germany’s 10-year government bond, the benchmark for the region, was up 1.6 basis points at 0.27 percent.
Dutch government bonds are normally slow to react to political concerns, given the country’s triple-A rating and economic and fiscal strength. But the Dutch 10-year bond yield spread over Germany hovered near one-year highs of 22 bps ahead of an auction of 10-year government bonds. Dutch political parties have struggled to form a government since a general election in March.
Finnish 10-year bond yields rose 2 bps to 0.345 percent, following news that Prime Minister Juha Sipila will break up his three-party coalition, saying he wanted to eject the nationalist Finns Party. The “transatlantic spread” between German and U.S. 10-year borrowing costs were close to one-month highs at 195 bps as U.S. ratesetters were set to begin a two-day meeting later on Tuesday.
Expectations are for the Fed to raise its benchmark interest rate on Wednesday and to potentially provide more detail on its plans to shrink the mammoth bond portfolio it amassed to nurse the economic recovery. Elsewhere, euro zone finance ministers and the International Monetary Fund are likely to strike a compromise on Greece on Thursday, paving the way for new loans for Athens while leaving the contentious debt relief issue for later, officials said.