Government bond markets across the eurozone scissored wide apart on Thursday as investors fled Portugal and Greece for the relative safety of German bonds.
Government bond prices fell sharply across the eurozone’s southern flank, pushing yields higher, as investors demanded higher returns on their investment because of renewed fears of a Greek default and Portugal’s trouble in keeping to eurozone deficit rules.
Yields on 10-year Greek government bonds rose to 11.4 percent on Thursday from 10.9 percent the previous day, and Portuguese yields tightened to 4.0 percent from 3.7.
German 10-year bonds, considered to be the eurozone’s safest investment, was in strong demand, with yields going down to 0.19 percent from 0.24 a day before, near levels last seen in 2015.
“Risk aversion is back,” said Jean-Francois Robin, bond strategist at Natixis bank. “Investors are taking refuge in the safest assets,” he told AFP.
Spanish yields also rose, but more modestly, to 1.76 percent from 1.72 percent, while Italian yields tightened to 1.69 from 1.64.
France, considered safer than its southern neighbours but not as safe as Germany, saw its yields ease to 0.58 percent from 0.62.
Governments issue bonds at a discount to finance their debt, and prices in the market reflect their perceived ability to keep up with regular interest payments and redeem the bonds on maturity.
The hope for weaker economies like Greece and Portugal in joining the eurozone was that the single currency and strict budgetary rules would reduce their borrowing costs, bringing them close to heavyweights Germany and France.
But since fears of a Greek debt default emerged in 2010, that convergence stopped at times of tension, with investors making sharp distinctions between troubled southern economies and the more solid ones in the north of the eurozone, especially powerhouse Germany.