The seemingly inexorable decline in the yields of peripheral euro-zone government bonds has finally begun to reverse over the past couple of weeks. Admittedly, the recent rise in peripheral bond yields has been in line with the increase in the yield of their benchmark, German bunds. And the yield of bunds to be kept low by the ECB’s quantitative easing (QE) programme. However, the spreads of peripheral bonds over bunds may rise sharply in the future. They have been driven down partly by the global search for yield, which may fade away as monetary policy is normalised, starting with the US.What’s more, Greece’s negotiations with its creditors remain fractious, and if Greece defaulted, and especially if it left the euro, we could see peripheral bond yields spike. “Looking ahead, we think that these yields are more likely to continue to climb than to fall again. We continue to think that the risks to the yields of peripheral sovereign bonds are firmly weighted to the upside.” says Capital Economics
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