Lower-rated euro zone bond prices slipped on Friday, deepening sharp falls on Thursday triggered by nervousness about the stability of the Greek government, a tax on foreign holders of Greek bonds, and weak growth.
The rally in peripheral government bonds had been fairly steady since the start of the year, but some analysts suggested the reversal might be more than a blip.
“There will be some investors that are concerned, and should take into consideration that is not just a one-day movement but something more prolonged,” said Daniel Lenz, strategist at DZ Bank.
The yield on Greek 10-year government bonds was up 4 basis points at 6.87 percent, following a jump of over half a percentage point on Thursday.
Italian, Portuguese and Irish 10-year bonds also rose 4 bps, to 2.73, 3.75 and 3.12 percent respectively, while Spain’s were 1 bp higher at 3.02 percent.
Thursday’s price falls were largely attributed by traders to a Greek government circular detailing capital gains tax that would apply to non-resident holders of Greek debt between 2012 and 2013.
Greece’s government said the document had only sought to clarify that the previous tax regime of 33 percent on foreign legal entities and 20 percent on individuals had been abolished in 2014, although it later withdrew the document.
Strategists said the Greek tax regime could have implications for how governments, desperate to balance their widening budget deficits, may look for future private sector contributions. Italy was quick to deny that it had any plans for a retroactive tax.
“The price action was very telling…it just showed how fast such a stampede can be generated to avoid any such confiscatory actions,” said KCG strategist Ioan Smith.
Others pointed out that double taxation agreements in Europe would exempt many investors from such a tax, adding that the shift in market sentiment was more likely a response to Greece’s fragile political situation ahead of European elections.
Expected gains for Greek euroskeptic parties in next week’s election might erode domestic support for the ruling coalition and potentially trigger a general election.
In addition, EU economic growth came in much lower than expected on Thursday, weighed down by shrinking output in Italy and Portugal.
The slowdown is increasing pressure on the European Central Bank to ease monetary policy further, with markets now broadly expecting its June meeting to introduce a package of policies, including cuts in all its interest rates and targeted measures aimed at boosting lending to small- and mid-sized firms.
Until that materializes, strategists say peripheral yields may continue to edge higher. Ireland, however, could get a boost later on Friday, with Moody’s scheduled to review its rating.