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Bund yields off highs as German election brings some relief

·2-min read

By Dhara Ranasinghe

LONDON, Sept 27 (Reuters) - Government bond yields in Germany edged down from more than 2-1/2 month highs on Monday, in a sign of some relief among investors as the tail risk of a leftist coalition taking shape after a national election faded.

Euro zone debt markets in general were calmer after a sharp selloff last week triggered by a hawkish shift among major central banks including the U.S. Federal Reserve and the Bank of England.

For now, focus shifted to Europe's powerhouse economy Germany, where provisional results from Sunday's election showed the centre-left Social Democrats (SPD) won 25.7% of the vote, ahead of 24.1% for Chancellor Angela Merkel's CDU/CSU conservative bloc.

"The left-wing Die Linke party’s poor election showing appears to have ruled out a left-wing alliance," analysts at the BlackRock Investment Institute said in a note, adding that either the conservative bloc or the SPD have the chance to lead a moderate coalition.

Germany's benchmark Bund yield fell 1.4 basis points in early trade to -0.24%, having risen on Friday to -0.218% -- its highest level since early July.

To secure a majority in parliament, the SPD is likely to seek an alliance with the Greens and the liberal Free Democrats (FDP) in a "traffic light" coalition, although the two parties could also team up with the conservatives in a so-called "Jamaica" coalition.

While coalition talks could drag on for weeks or even months, investors appeared comforted from the fact that the election results suggest the next government would be made up of largely centrist parties.

Across the euro area, bond yields were lower on Monday. Italy's 10-year bond yield was down 2 bps at 0.77%.

European Central Bank President Christine Lagarde appears in front of EU parliament committee later in the day. Her comments are likely to be watched closely by markets on edge that central banks are steadily moving towards unwinding post-pandemic stimulus.

Many of the drivers of a recent spike in euro zone inflation are temporary and due to fade in the next year, Lagarde said last week.

"Global hawkish headwinds from the tentative tilt in central bank exit thoughts remain another factor and could push 10-year Bund yields closer to the -0.2% mark," said Commerzbank rates strategist Rainer Guntermann.

"ECB comments thus remain important with Lagarde likely to stress in her hearing at the EU parliament today that the ECB is barely recalibrating its policy and to remain on a different path compared to the Fed or BoE."

(Editing by Alison Williams)

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