German bond yields stable as Omicron fears subside

European stocks hit a five-week high on Tuesday, encouraging Wall Street to hit record highs overnight, as risk appetite remains strong until the end of the year.

The yield on German 10-year government bonds, the benchmark for the euro area, rose 0.5 bps to -0.238%

“We continue to view the Omicron as a less dangerous variant; if it doesn’t, we will probably have to change our forecast,” said Andrea Delitala, Head of Euro Multi-Asset at Pictet Asset Management.

“The general idea is that governments will be able to cope with the pandemic, but central banks will not change their more hawkish stance designed to fight inflation,” he added to explain the rise in yields. .

Italian government bond prices outperformed their peers on Tuesday night after underperforming early in the session and days prior. The 10-year yield fell 2bp to 1.108% after rising 3.5bp to 1.165%.

“Spreads react to country-specific news, namely the debate over whether Mario Draghi will remain prime minister or become president of Italy,” said Thomas Wacker, chief credit officer at the Chief Investment Office of UBS Global Wealth Management .

Italy’s parliament will choose a new president in January, and former ECB chief Mario Draghi, the top candidate, will have to step down as prime minister if elected.

Analysts have warned of a potential increase in Italy’s risk premium if Draghi becomes president, as confidence in the debt-riddled country’s economy improved when he took office as prime minister in February 2021.

They see early elections as the worst-case scenario and political uncertainty could hurt bond prices.

“We see the spread between Italian and German 10-year bond yields widen to 150 basis points if political uncertainty over the future of the current government persists,” said Delitala de Pictet, adding that he considered the probability of early elections to be very low.

Even if he is named president, Draghi could appoint a high-ranking cabinet minister as his successor, and Italy could benefit from a relatively stable policy in 2022 as Draghi’s seven-year reign as the head of the government begins. the state.

The spread between Italian and German 10-year rates was 133.7.

Some investors have argued that a less stringent fiscal policy approach expected from Germany’s new government when European Union countries discuss Stability Pact reform in 2022 would support peripheral bond prices.

France and Italy last week called for EU fiscal rules not to prevent member states from making investments, adding that the EU’s $ 800 billion stimulus fund has been a success that should serve as a model for the future.

(Report by Stefano Rebaudo, edited by Angus MacSwan)

By Stefano Rebaudo

James R. Rhodes