Bonds: Risk appetite bounces back, Italian political risks eyed

These were the movements in some of the most widely-followed 10-year sovereign bond yields:

US: 2.35% (+5bp)

UK: 1.15% (+7bp)
Germany: 0.20% (+1bp)
France: 0.88% (-5bp)
Spain: 1.66% (-4bp)
Italy: 2.13% (-6bp)
Portugal: 3.88% (-6bp)
Greece: 7.14% (-4bp)
Japan: 0.05% (-1bp)

Gilts underperformed alongside downward pressure on the pound, as remarks about higher infrastructure spending from US president Donald Trump fed risk apettite while reports the SNP might push for a second referendum weighed on Sterling.

In a meeting with state governors at the White House, Trump promised a "historic" increase in US defence spending and said he would talk to Congress about his plans for infrastructure spending.

"We're going to start spending on infrastructure big," he said.

Trump's remarks - ahead of an eagerly awaited speech before Congress the next day - saw longer-dated US Treasuries retrace a large part of their price losses from the previous Friday and weighed on Gilts.

Good news out of France, worrying news from Rome

Acting as a backdrop, investors were keeping a close eye on political events in France and Italy, the euro area's second and third largest economies, respectively.

Significantly, the latest daily poll from Opinionway put support for Marine Le Pen at 26% in the first round of France's presidential election and centrist independent Emmanuel Macron at 24% (+1), while centre-right Francois Fillon was unchanged at 21%.

In Italy on the other hand, events at the weekend saw left-wing rebels from within the PD's ranks quit and found - together with members of the Italian Left party - the Progressive and Democratic Movement (DP), after Renzi pushed for a party Congress to choose the next Secretary General (likely himself) to be held in April, instead of in the third quarter of 2017.

That, economists at Barclays said, meant an increased possibility of higher Italian political risk over the medium-term.

"Much ado about nothing? We do not think so. While the PD party split is unlikely to have immediate repercussions on government stability, we believe that it may have non-trivial implications for the outlook for the next general elections.

"If the newly created junior left-leaning DP party that emerged after the party split is able to drain popularity from the PD, and the voting system is not reformed so as to push parties to form pre-electoral coalitions (not our baseline), we do not rule out that anti-establishment/euro parties may be able to form a government after elections," Fabio Fois at Barclays said in a research report sent to clients.

Nevertheless, in the event investors appeared to shrug off the potential implications of such a scenario.

Weakish US data

To take note of, US durable goods orders in the States rocketed 1.8% month-on-month in January, albeit due to a surge in defense orders (8.0%) and in those for non-defence aircraft and parts (69.9%), two of the most volatile categories.

"Both of these components are key inputs to the BEA’s estimate of equipment investment in GDP, and we see the core data as consistent with soft business sentiment and modest GDP growth. Most categories of orders and shipments posted sizable declines," Barclays's Blerina Uruci said.

On the shorter-end of the curve, the yield on two-year German government bonds was up by two basis points to -0.928%, while that on similarly-dated US Treasuries stood at 1.19%, five basis points higher on the day.