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Euro zone bond yields steady ahead of inflation data

Yoruk Bahceli
·2 min read

* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr

By Yoruk Bahceli

AMSTERDAM, March 2 (Reuters) - Euro zone bond yields steadied on Tuesday, after rallying a day earlier, as markets awaited February inflation data for the bloc.

After their worst monthly performance in years in February - when bets that U.S. fiscal stimulus would boost inflation and growth sent global bond yields sharply higher - markets changed course on Monday, with bonds rallying sharply particularly in Europe and Asia.

After major benchmarks on Monday marked their best daily performance since June 2020, euro area bonds calmed on Tuesday, with Germany's 10-year yields, the benchmark for the region, unchanged at -0.34% by 0814 GMT.

Yields on 10-year Italian bonds were also unchanged at 0.66%, leaving the closely watched gap with German equivalents -- the risk premium on Italian debt -- below 100 bps.

The focus was on a flash estimate of February inflation in the bloc due at 1000 GMT. A Reuters poll expects it to show a 0.9% rise in prices year-on-year, unchanged from January, while a narrower measure stripping out food and energy costs is expected to show inflation easing to 1.1% from 1.4% last month.

However, individual inflation readings from Italy and Germany on Monday slightly exceeded expectations.

"In the current market environment, in which stabilization by the central bank is still fragile, a stronger-than-expected reading is likely to put renewed pressure on yields," UniCredit analysts told clients.

Focus was also on the European Central Bank, whose weekly bond buying data showed a slowdown in net purchases during last week's sell-off, while many called for an increase, although the bank said the decline was due to high redemptions.

The ECB's weekly financial statement at 1400 GMT will show the extent of those redemptions.

The bank's vice president Luis de Guindos said in comments to Portuguese newspaper Publico published on Tuesday that the ECB is totally open to recalibrating its programme if it concludes the rise in nominal yields will have a negative impact on financing conditions. Several policymakers have called on the bank to act.

Despite last week's numbers, Christoph Rieger, head of rates and credit research at Commerzbank, said several clues hinted that the ECB may have increased its bond purchases since.

He cited a simultaneous rally in German and Italian bonds on Monday without an apparent driver, the widening in swap spreads and the outperformance of 30-year German bonds late last week against their U.S. equivalents. (Reporting by Yoruk Bahceli; Editing by Susan Fenton)