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22 May 2014

WSJ: Riskier eurozone bonds retreat

Yields on Italian, Spanish, Portuguese and Greek government bonds have risen sharply in recent days. Bond yields and prices move in opposite directions.

Italian 10-year bond yields climbed to as high as 3.33 per cent, well above their record low of 2.90 per cent reached last week, and the highest since early April, before edging back to 3.18 per cent. Spanish 10-year yields rose to 3.17 per cent, up more than 0.25 percentage point from a week ago, although they later fell back to 3.00 per cent. Underpinning the moves is a mix of factors: some investors selling their bonds to lock in hefty profits at roughly the same time, disappointing growth inside the currency bloc, and signs of economic slowdown in the US and China. Investors also point to jitters ahead of European Parliament elections, with anti-European Union parties across the continent expected to put in a strong showing.

Yields remain close to record troughs in most countries, but the latest wobble represents one of the biggest setbacks for these bonds since the summer of 2012, when European Central Bank President Mario Draghi promised to do whatever it takes within the central bank's mandate to save the euro. Mr Draghi's words at the time helped to calm investor nerves over a common currency region that looked close to unraveling. As concerns over the fate and composition of the euro zone were soothed, investors piled in, pulling down yields. But yields then fell so low that at least some investors said they weren't being adequately compensated for the risk they take.

Bets on bonds in the euro zone's fiscally fragile periphery have been a popular trade this year. That has helped bond fund managers mask poor performance elsewhere, given many missed the rally in Bunds and US Treasurys, according to interest-rate strategists at Royal Bank of Scotland. Alongside the recent weakness in debt markets is a former bugbear: political uncertainty. For some investors and traders, impending elections for the European parliament are a source of unease.

Others are confident that a search for returns in Europe's former trouble spots will continue once short-term anxieties are out of the way, especially given the ECB is likely to ease monetary policy further this summer.

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© Wall Street Journal

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