© Reuters. FILE PHOTO: A picture illustration of euro banknotes, April 25, 2014. REUTERS/Dado Ruvic/File Photo
By Yoruk Bahceli
(Reuters) – Euro zone bond yields steadied ahead of crucial U.S. inflation data that is expected to set the tone for markets on Wednesday.
U.S. consumer prices are expected to have risen 5.3% year-on-year in July, according to a Reuters poll, slightly below last month’s 5.4% but keeping inflation elevated.
Two U.S. Federal Reserve officials said this week that inflation is already at a level that could satisfy one leg of a key test for the beginning of rate hikes and this has furthered investor focus on when the Fed might start tapering its bond buying.
Better-than-expected U.S. jobs data on Friday had already halted the sharp falls in both U.S. and euro area yields as the data was seen as bringing the Fed a step closer to scaling back the bond purchases.
On Wednesday, Germany’s 10-year yield, the benchmark for the euro area, was unchanged on the day by 0651 GMT at -0.45%, below the highest since August 2 at -0.447% touched on Tuesday.
That is comfortably above six-month lows at -0.524% touched last week.
But while 10-year U.S. Treasury yields are up 6 bps this week, German 10-year bonds have outperformed, as yields are unchanged. Bond yields move inversely with prices.
“The relative Bund strength will be put to the test with another bumper CPI lining up and more hawkish Fed talk lingering,” Commerzbank (DE:) strategists Michael Leister and Hauke Siemsen said.
The outperformance of German Bunds has further widened the gap between 10-year German and U.S. Treasury yields to over 181 bps, the widest since June. Bond yields move inversely with prices.
The diverging outlook of the European Central Bank from the Fed, especially after its revision of its inflation target will mean it keeps rates lower for longer, has supported euro area government bonds.
“We expect USD rates will rise much faster from here. With Fed tapering coming into view, the divergence with ECB (quantitative easing) policy will become more obvious,” ING analysts told clients.
Focus was also on the primary market, with the bloc’s only government debt auction of the week, the 4 billion euro re-opening of a 10-year German bond scheduled.
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