Worries over German government crisis pin down bond yields

[LONDON] Germany's government bond yields fell towards recent one-month lows on Wednesday as a row over migration policy in Germany's coalition government rumbled on, raising concerns that the eurozone's biggest economy could be headed for snap elections.

Four hours of talks late on Tuesday between Chancellor Angela Merkel and her conservative Bavarian allies failed to resolve the row, just ahead of a summit of EU leaders who are also divided on the issue.

"The market is quite focused on these political issues ahead of the EU summit, and headlines about the coalition breakdown do tend to move bonds and spreads," said Christoph Rieger, a rates strategist at Commerzbank.

"People had thought no matter what the two parties would stick together, but there was no news this morning to suggest that."

The uncertainty benefited German bonds - regarded as one of the safest assets in the world.

The yield on Germany's benchmark 10-year Bund dipped around one basis point to 0.32 per cent, edging closer to one-month lows hit this week.

Bond yields across the currency bloc were one to four basis points lower, with analysts noting a recovery in prices a day after investors digested bond supply from France and Spain. A bond's yield and price move in opposite directions.

Spain on Tuesday launched a 10-year bond, sold via a syndicate of banks. While there was strong demand for the new seven billion euro bond, Mizuho noted that the deal was the smallest 10-year launch in two years.

Italian bond yields, which saw the sharpest rises on Tuesday as some investors were thought to have sold Italian debt to buy the new Spanish bond, were broadly lower on Wednesday.

REUTERS