Tuesday 18 / November / 2025
London: Safe-haven German Bunds were in demand and lower-rated debt including Italian bonds sold off on Monday as a debate over migration threatened to widen divisions within the euro zone and put the German government at risk of collapsing.
While the migration issue itself is not a primary concern for markets, the effect it could have on euro zone integration and the possibility of a snap election in Germany are worrying investors, analysts said.
The debate also coincides with heightened trade tensions with the United States and falling oil prices.
German Chancellor Angela Merkel conceded on Sunday that the bloc had failed to find a joint solution to the migration issue, threatening her government, and said she would seek direct deals with individual EU states.
"It looks like all the news flow over the weekend hasn't been too encouraging for risk sentiment," said Commerzbank rates strategist Michael Leister. "The ongoing standoff in Germany and the risk to the coalition government is providing a decent bid for Bunds."
He said that though the topic of migration was not a major concern for markets, the effect it could have on the German government was a worry.
"The concern is over what it means for euro area politics, what it means for" French President Emmanuel Macron's plans for further euro zone integration, he said.
Germany's government debt tends to perform strongly in times of trouble, as it is seen as one of the safest and most liquid assets in the world due to its top rating and the size of the market.
Accordingly, Germany's benchmark 10-year bond yield hit its lowest in nearly a month at 0.315 per cent, down 2 basis points on the day. Other high-grade euro zone yields were 1-2 bps lower on the day.
Lower-rated government debt sold off, with Italy's 10-year yield jumping 4 basis points and its spread over Germany -- seen by many as an indicator of sentiment towards the bloc -- reaching its widest level in two weeks at 244.5 bps.
Spanish and Portuguese equivalent yields were also higher.
Mizuho strategists said the topic of migration was likely to dominate an EU summit that begins Thursday.
"This could stoke tensions within the German and Italian coalitions and risk populist parties gaining more power if early elections were called," they said in a note. "In Italy in particular, the danger of the League running on an openly anti-Euro platform, even if slim, should keep the curve under flattening pressure."
Italy's two-year bond yields were up 13 basis points on the day at 1.03 per cent and the spread with the 10-year yield was at its flattest in two weeks at 174 bps.
News that the US is drafting curbs that would block firms with at least 25 per cent Chinese ownership from buying US companies with "industrially significant technology" also impacted risk sentiment, hurting stock markets.
The pan-European STOXX index was down half a percent at the open.
