German bunds rally as Turkish turmoil rages; Italy-Germany yield spread highest in 3 months

The German bunds rallied during European session Monday as political turmoil in Turkey took a savage turn, forcing investors to turn risk-averse, thus leading to a rise in debt prices. Additionally, the yield spread between Italian and German bond yields rose to its widest in about 3 months, after Turkish leaders voiced that their country won’t be victimized by U.S. threats.

The German 10-year bond yields, which move inversely to its price, fell nearly 1-1/2 basis points to 0.31 percent, the yield on 30-year note slipped nearly 1 basis point to 0.97 percent and the yield on short-term 2-year traded tad lower at -0.65 percent by 09:50GMT.

The gap between Italian and German 10-year government bond yields rose to its widest since late May on Monday, reflecting heightened investor concern about Italian political developments and global risk aversion. The widening reached 272 basis points followed by comments from a senior government official over the weekend that speculators are expected to attack Italian financial markets this month but the country had the resources to defend itself, Reuters reported.

Further, after a quiet start to the week with no new top-tier economic data, tomorrow brings the second estimate of euro area Q2 GDP. The preliminary release suggested an increase in economic output of 0.3 percent q/q, down from the 0.4 percent q/q pace in Q1. Tuesday will also see the release of the first estimate of German Q2 GDP – following a slowdown in growth at the start of the year to 0.3 percent q/q, it is expected to rise 0.5 percent q/q, although a 0.4 percent q/q print also seems feasible, Daiwa Capital Markets reported.

Meanwhile, the German DAX slipped 0.60 percent to 12,348.30 by 09:55GMT, while at 09:00GMT, the FxWirePro's Hourly Euro Strength Index remained neutral at -56.79 (higher than +75 represents bullish trend). For more details, visit http://www.fxwirepro.com/currencyindex