Peripheral Euro Bonds Attract Haven Demand Amid Trade Tensions

(Bloomberg) -- Move over bunds, Europe's peripheral debt is becoming the choice of investors as global trade war tensions escalate.

Italian bonds were the biggest gainers among euro-area sovereign securities in the wake of China's riposte to the U.S.'s imposition of tariffs. That's despite Italy still lacking a working government since its March 4 election, and German bunds traditionally being the go-to haven for investors in periods of heightened risk-off sentiment.

The latest outperformance among the region's higher-yielding debt plays into the narrative of the continuing economic recovery of those nations hit hardest by the financial crisis 10 years ago. Spanish and Portuguese bonds have also undertaken their own remarkable rallies in recent months amid a spate of credit-rating upgrades, while the European Central Bank still pumps 30 billion euros ($37 billion) a month into the region's bond markets.

“It's striking that Italian bonds have outperformed against virtually everything,” Michael Leister, head of rates strategy at Commerzbank AG, said in emailed comments. “While Spain is benefiting from the rating convergence with semi-core, it is noteworthy that BTPs also rallied with yields falling to lows for the year, underscoring the safe-haven status that investors see even for Italy.”

Italian 10-year yields dropped one basis point to 1.74 percent as of 9:34 a.m. in London, after reaching 1.73 percent, the lowest level since Dec. 13. Those on their Spanish peers are close to the least since October 2016, while comparable Portuguese yields fell last week to a level not seen since April 2015.

China and the U.S. have stepped back from their most strident rhetoric, with officials from both sides stating that tariffs are merely a proposal at this stage. That could ease some of the haven flow into government bonds, according to Mizuho International Plc.

“The balance of risks in the near term is skewed towards an appeasement of trade tensions between the U.S. and China,” Mizuho strategists including Peter Chatwell wrote in a note to clients. “This is enough to prevent further core rates market gains at current levels.”

The yield on German 10-year bunds, the region's benchmark securities, increased two basis points Thursday to 0.52 percent.

To contact the reporter on this story: John Ainger in London at jainger@bloomberg.net.

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Keith Jenkins, Scott Hamilton

©2018 Bloomberg L.P.