Eurozone borrowing costs rise on inflation concerns, Bund yield above -0.1%

Germany's 10-year yield, the benchmark for the region, rose 3 basis points

  
Euro currency bills are pictured at the Croatian National Bank in Zagreb, Croatia, May 21, 2019.

Euro currency bills are pictured at the Croatian National Bank in Zagreb, Croatia, May 21, 2019.

REUTERS/Antonio Bronic

MILAN- Euro zone bond yields continued their rise on Thursday after a stronger than expected reading for U.S. consumer prices sent them to two-year highs the day before on concerns about sustained inflation and possible tightening of monetary policy.

Reassuring comments by the Fed eased some market nerves late in the European session, with U.S. Treasury yields down 3 basis points at 1.67%.

Fed officials said inflation would be volatile, while the central bank plans to keep its support for the economy. 

"Everything considered, we remain cautious and suggest selling Bunds into strength," Commerzbank analysts told clients.

Massimiliano Maxia, a senior fixed income specialist at Allianz Global Investors, said he expected the 10-year Bund yield to rise to zero in the near term, with U.S. borrowing costs at 1.8%-2.0%.

Germany's 10-year yield, the benchmark for the region, rose 1 basis point to -0.12%, after hitting a new high since May 2019 for the first time above -0.1%, at -0.096%.

Meanwhile Italy's Treasury sold the maximum planned amount of 9.25 billion euros in three BTP auctions, with yields rising to their highest level since September 2020.

Concerns about growing public debt and uncertainty about the timing of Italy's recovery plan continued to weigh on Italy's bond prices, which move inversely with yields.

Italy's 10-year government bond yield was up 3 basis points at 1.01%, after touching a new high since September 2020 at 1.049%. The closely watched yield spread with German Bund rose 3 bps to 113 basis points.

According to Unicredit analysts, U.S. Treasuries will continue to be in the driving seat, while Bund borrowing costs - barring their correlation with U.S. yields - should have no reason to rise as the inflation outlook in Europe is more benign due to a smaller fiscal stimulus.

"It seems reasonable that the upward movement in breakeven rates is a consequence of spillover" from the U.S., they said.

With a further increase in U.S. breakeven rates coupled with U.S. real yields at historically low levels, "markets would probably price in no action by the Fed but will price in an increased risk of an overshooting of inflation", they added.

Expectations of long-term euro zone inflation reached a new high since 2018 at 1.628%. 

The chart below shows German borrowing costs and expected inflation on the same path since May.

U.S. initial jobless claims and producer prices (PPI) data failed to trigger any price action in euro zone bonds.

(Reporting by Stefano Rebaudo, Editing by Hugh Lawson) ((stefano.rebaudo@thomsonreuters.com; +390266129431;))

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