Eurozone government bond yields dipped yesterday as an unexpected fall in German industrial orders served as a reminder that a softening in economic data will encourage the European Central Bank to prolong an unwinding of stimulus. German industrial orders unexpectedly dropped for the third month running in March due to weak foreign demand, data showed, suggesting factories in Europe's largest economy are shifting into a lower gear.
A growing perception that a rise in euro zone interest rates will now come much later than anticipated due to slowing growth momentum and subdued inflation has underpinned euro zone bond markets although a jump in oil prices could limit further falls.
Ten-year bond yields were down roughly 1 basis point on the day, with overall trade subdued as London markets were closed for a holiday.
"Bonds are a bit firmer on the back of the softer German data," said Commerzbank rates strategist Rainer Guntermann. "A lot has been repriced in terms of the ECB so the outlook for bonds is a bit more mixed."
Yet strength in bond markets suggests investors are not convinced that inflation will hit the ECB's near-2 percent target anytime soon.
Data last week showed inflation unexpectedly slipped in April to 1.2 percent.
Germany's 10-year bond yield dipped 1 basis point to 0.54 percent, close to a 2-1/2 week low hit after Friday's weaker-than-expected U.S. jobs data.
Italy remained in focus after the leader of Italy's anti-establishment 5-Star Movement said on Monday his party would not back any stop-gap, technocrat government put together to end two months of political deadlock.
Luigi Di Maio said if it is not possible to put together a government based on a political deal between 5-Star and the far-right League then a repeat election should be held. The leader of the League, Matteo Salvini, said yesterday he had asked the president to give him a mandate to try to form a government to end the deadlock.
The Italian/German 10-year bond yield gap was at 125 bps. On Friday it hit 126 bps, the widest in over two weeks.
"Italian BTP/Bund spreads will be further put to the test by last ditch efforts in Italy to hammer out a government coalition," said Benjamin Schroeder. "As a last resort, a transitional government would be followed by new elections."
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