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UPDATE 2-Euro zone bond yields at six-week highs as ECB unease lingers

reuters.com · 09/01/2021 06:29
UPDATE 2-Euro zone bond yields at six-week highs as ECB unease lingers

Updates with Weidmann comments, adds quote, updates prices

By Dhara Ranasinghe

- Government bond yields across the euro area touched their highest levels in around six weeks on Wednesday, pushed up by unease over the future pace of European Central Bank bond purchases.

Borrowing costs across the bloc shot up on Tuesday as news that euro area inflation surged to a 10-year high in August and hawkish comments from European Central Bank policymaker Robert Holzmann unnerved investors. nL1N2Q20LW

The ECB's Klaas Knot said late on Tuesday he expected the ECB to start reducing the pace of its emergency bond purchases at next week's meeting, with a view to ending them in March. nS8N2MM039

Bundesbank President Jens Weidmann weighed in on Wednesday, saying euro zone inflation is at risk of overshooting the ECB's projections as the temporary factors behind its recent spike could seep into underlying price growth. nF9N2N601N

Bond markets, while calmer, remained on edge as ECB hawks pushed the case for a policy shift.

Germany's 10-year Bund yield touched its highest level in just over six weeks at -0.354%. It was last up 1.3 basis points at -0.367% DE10YT=RR.

The German 10-year inflation-linked bond rose to a five-week high at around -1.781% DE10YIL=RR.

Italy's 10-year bond yield rose to 0.729% IT10YT=RR, also briefly hitting its highest in around six weeks. It was last trading flat on the day at 0.71%.

"The fact that you can interpret inflation in two different ways means you see a growing gulf in opinion open up between central bankers, and that's the case on both sides of the Atlantic," said Richard McGuire, head of rates at Rabobank.

The ECB and the Federal Reserve have argued that the upward rise in price pressures will likely prove temporary.

But there is also an argument that the rise in inflation, boosted by massive fiscal stimulus and exacerbated by supply bottlenecks, could continue and no longer justifies massive monetary stimulus.

"I think the ECB is still convinced that inflation is transitory," said Eric Vanraes, a portfolio manager at Eric Sturdza Investments.

"In the ECB mind's, higher inflation should be introduced by higher wages all over Europe but I don't think that's possible."

Focus was on Germany, which on Wednesday sold a new 30-year bond via a syndicate of banks.

Germany received more than 18 billion euros ($21.3 billion) of investor demand for the new bond, according to memos from two lead managers seen by Reuters. nL8N2Q322O

There was also strong interest in five and 30-year Greek bonds being sold by a syndicate of banks on Wednesday, according to a lead manager memo. nA8N2O700Z nS8N2M107J

Euro zone bond yields risehttps://tmsnrt.rs/3kJld0E

(Reporting by Dhara Ranasinghe; Editing by Bernadette Baum and Mark Potter)

((Dhara.Ranasinghe@thomsonreuters.com; +442075422684;))