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Euro zone bond yields tick up, inflation expectations rise

·3 min read

By Dhara Ranasinghe

LONDON (Reuters) -Most euro zone bond yields edged slightly up on Monday as investors returned their focus to a brighter economic outlook and its implications for central bank policy after large swings following Friday's U.S. non-farm payrolls data.

Rising crude oil prices after a major cyberattack forced the shutdown of critical fuel supply pipelines in the United States meanwhile fuelled euro zone inflation expectations. [O/R]

A key market gauge of long-term inflation expectations in the bloc rose above 1.56%, its highest in almost four weeks.

Germany's 10-year Bund yield briefly touched its highest level in almost a week.

"There is a very broad consensus out there for higher Bund yields, and we agree," said ING senior rates strategist Antoine Bouvet.

"There is a visible nervousness in peripheral debt at the prospect of ECB slowing purchases down. We're surprised the market hasn't come to terms with it yet," he added.

While the European Central Bank has stepped up the pace of buying within its PEPP emergency stimulus scheme, signs that the recovery is taking hold have led some officials to talk about slowing purchases in the months ahead.

Investor morale in the euro zone rose in May to its highest level since March 2018, a survey showed on Monday, suggesting the bloc is overcoming the COVID-19 crisis.

ECB policymaker Martin Kazaks said on Friday the central bank could decide to reduce the pace of its emergency bond purchases in June if borrowing costs remain low.

In a sign of division among policymakers, ECB chief economist Philip Lane told a French newspaper that the ECB could still increase bond purchases in June if such a move is needed to keep borrowing conditions favourable.

ECB bond-buying data will be published later in the day.

Data on Friday showing the U.S. economy added just 266,000 jobs in April, a fraction of nearly a million expected, triggered big but short-lived swings in U.S. and euro zone government bonds.

Analysts said markets now appeared to be looking past those numbers and to Wednesday's U.S. inflation data for the next clues on the U.S. economic outlook.

In late afternoon trading, most 10-year bond yields in the currency bloc were flat or up around 1 basis point.

Germany's 10-year Bund yield briefly rose to -0.192% in early trades, its highest in almost a week, before pulling back to about -0.215%, still up slightly on the day.

Germany hired a syndicate of banks on Monday to sell a 30-year green bond that will extend its yield curve of bonds backing environmentally friendly spending, according to memos from three lead managers seen by Reuters.

The bond will be launched "in the near future, subject to market conditions," the memos said, a phrase debt management offices usually use a day before the sale.

The 30-year bond, the first such sale this year, will extend Germany's green yield curve following the issuance of an inaugural 10-year green bond last September and a five-year green bond in November.

(Reporting by Dhara Ranasinghe, additional reporting by Julien Ponthus; Editing by Catherine Evans and Steve Orlofsky)

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