Political risk clouds Euro outlook – Deutsche Bank

Finance

Political risk clouds Euro outlook – Deutsche Bank

Deutsche Bank analysts, led by Jim Reid, point out that Euro Area sovereign spreads tightened, with Italian BTP and French OAT yields hitting multi‑month lows, while 10‑year Bund yields were steady. However, they warn UK political developments could spill over into European sentiment, as a key by‑election may pressure Prime Minister Starmer and revive concerns over fiscal loosening and gilt market volatility.

Spreads tighten but risks linger

“Earlier in Europe, sovereign bonds had put in a stronger performance, with a fresh tightening in sovereign bond spreads too.”

“So yields on 10yr Italian BTPs (-0.6bps) hit their lowest since December 2024, and those on French OATs (-1.2bps) fell to their lowest since July.”

“By contrast, 10yr bund yields (+0.1bps) were steady, but that also meant Frances 10yr spread over Germany fell to just 55bps, the tightest since Macron called the snap legislative election back in June 2024.”

“Looking forward, UK politics will be back in the spotlight today, as a by-election is taking place in the Greater Manchester seat of Gorton and Denton.”

“That‘s a significant one, because the governing Labour Party won it convincingly at the general election in 2024 but opinion polls suggest they could lose it today, which would put Prime Minister Starmer’s position under growing pressure.”