Euro zone bond yields slipped on Monday as a rising coronavirus death toll boosted demand for safe-haven assets, though Irish debt underperformed slightly, as the weekend election outcome threatened a period of political uncertainty.
Irish borrowing costs did not move much in response to the election, which saw Sinn Fein, the former political wing of the Irish Republican Army, secure the largest share of votes in the election — a seismic shift from the country's century-old, center-right duopoly.
While Sinn Fein is demanding inclusion in the next government, the Fine Gael and Fianna Fail parties have for years insisted they would not govern with it, citing economic policies and its past links to the IRA. Both indicated on Monday they had not changed their stance.
But while Irish bank shares tumbled as much as 7% due to Sinn Fein plans to end tax breaks for lenders, 10-year sovereign bond yields were flat around the close of trade at -0.11% , having risen off a -0.13% low hit earlier in the day.
"It is not inconceivable you will have some kind of Sinn Fein involvement in government. If they formed part of the government they would try to push for more spending," said Chris Graham, senior Europe economist at Standard Chartered.
"But there is no significant shift in the market yet…it's too early to gauge the economic and political impact."
Analysts also said the European Central Bank's asset purchase program alongside Ireland's own robust growth backdrop were insulating it from the threat of political uncertainty.
Natwest analysts said their research showed longer-dated Irish debt was around 4 bps cheaper than peers.
"We hold our call to be long 10-year Ireland versus Germany, targeting 25 bps (spread)," they told clients.
The spread is currently almost 30 bps.
Broader market focus remains trained on the spread of the coronavirus. That pushed most euro zone yields down 2-3 basis points on the day while 10-year U.S. yields slipped 2 bps .
While the World Health Organization's top emergency expert said the number of new cases reported from the epicenter of the outbreak had stabilized, the death toll has surpassed that of the 2003 SARS epidemic, causing concern about the growth outlook in China and elsewhere.
Fears that China would not be able to contain the outbreak sent euro zone investor morale lower for the first time in four months in February, the Sentix index showed.
Long-term euro zone inflation expectations fell to a two-month low of 1.2425%, off near six-month highs reached at nearly 1.35% in mid-January.
Germany's benchmark yield was at -0.41%, down 3 bps on the day, inching towards 3-1/2 month lows at -0.447% set last week. .
Markets did not react to news that Annegret Kramp-Karrenbauer, who was expected to be Germany's next chancellor, had decided not to run for the role.
Italy's 10-year yield was flat at 0.95% after Fitch maintained its negative outlook on the country's BBB credit rating, noting political fragmentation, high debt levels and weak banking sector asset quality. (Reuters)