UPDATE 2-Euro zone bonds stabilise, investors focus on U.S. data
LONDON, Aug 12 (Reuters) – Euro zone government bonds were unchanged to slightly firmer on Thursday, with Germany’s benchmark Bund holding just below a two-week high as markets continued to digest signs of easing inflationary pressures in the United States.
U.S. consumer price growth slowed in July, data showed on Wednesday, taking some heat out of speculation over when the Federal Reserve might taper bond buying..
Treasury yields rose only marginally after Thursday data showing above-forecast producer prices and the third weekly decline in unemployment benefit claims.
Antoine Bouvet, senior rates strategist at ING, said the European market was being driven more by U.S. data releases, leaving them acting “as a beta to Treasuries”. A lack of euro-centric news was limiting volatility, he added.
“The rise (in yields) that I’m expecting reaching into the year is in fact more likely to be driven by U.S. considerations – the fact that the Fed is going to taper,” Bouvet said.
U.S. yields were pushed higher earlier this week by Federal Reserve officials’ suggestions that asset purchases could soon be reduced.
That had helped lift Germany’s 10-year yield as high as -0.435% on Wednesday, but by 1455 GMT on Thursday it was -0.459% or flat on the day. Its Italian equivalent slipped 2.5 basis points at 0.546%.
The gap between Italian and German 10-year yields, the premium investors demand for exposure to Italy, was around 100 bps, having briefly narrowed below that threshold on Wednesday for the first time in a month..
“With the data/supply calendar cooling down, markets should remain in consolidation mode. We recommend buying dips,” Commerzbank rates strategists wrote in a note to clients.
A gauge of long-term euro zone inflation expectations – the five-year, five-year inflation forward – rose to 1.7178%, its highest since August 2018.
“The market’s now expecting that the ECB will let inflation run a bit further than it would normally have,” ING’s Bouvet said.
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