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UPDATE 2-Euro zone yields tick up after Fed's Powell flags quicker taper

·2 min read

(Adds Powell comment, updates prices,)

By Abhinav Ramnarayan

LONDON, Dec 1 (Reuters) - Euro zone government bond yields ticked up from two-month lows on Wednesday after the U.S. Federal Reserve said inflation was here to stay and indicated a quicker taper of bond purchases despite worries around the new Omicron coronavirus variant.

In the euro zone, a survey showed manufacturing growth in the bloc accelerated and supply chain bottlenecks worsened, driving the cost of raw materials up at the fastest rate in over two decades.

Germany's 10-year bond yield, the benchmark for the bloc, was two basis points higher on the day at -0.32%, rising off Tuesday's two-month low of -0.363%.

Other euro zone government bond yields were up across the board, with Italian 10-year bond yields – seen as the most vulnerable to monetary policy tightening – up 4.3 basis points at 1.025%.

While consumer price rises in Europe are generally expected to lag the United States, a strong euro zone inflation number on Tuesday did put some upward pressure on yields.

Investor expectations for long-term euro zone inflation rose to 1.88% on Wednesday from 1.80% last week, according to the five-year, five-year inflation-linked forward swap, a key money market gauge.

Many economists, however, don't expect the ECB to start raising rates before the end of the 2022 at the earliest.

"We do not expect the ECB to hike rates in 2022 and even 2023 looks unlikely," Unicredit strategists commented in a note.

U.S. central bankers in December will discuss whether to end bond purchases a few months earlier than expected, Federal Reserve Chair Jerome Powell said on Tuesday, pointing to a strong economy, stalled workforce growth and high inflation that is expected to last into mid-2022.

After months of cautious indications from policymakers, where inflation was viewed largely as transitory, this reversal was enough to lift government bond yields of major economies off recent lows.

On Wednesday, Powell reiterated there was a risk of persistent inflation, but said wages were not rising at a troubling rate.

"We don't see them moving up at a troubling rate that would tend to spark higher inflation, but that's something we're watching very carefully," he said during a hearing before the U.S. House Committee on Financial Services.

Benchmark 10-year yields US10YT=RR rose three basis points to 1.4868%, after dropping as low as 1.412% on Tuesday, which was the lowest since Sept. 24.

(Reporting by Abhinav Ramnarayan; additional reporting by Julien Ponthus; Editing by Edmund Blair, Angus MacSwan and Shailesh Kuber)

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