Bond yields rise after eurozone inflation surprise

Eurozone bond yields rose on Tuesday after the bloc’s August inflation reading came in well above expectations.

First estimate data showed inflation rose to 3% on an annual basis in August, the highest level in a decade, and well above the European Central Bank’s 2% target and 2.7% forecast in a Reuters poll.

Core inflation, a narrower reading that strips out volatile food and energy costs, also rose to 1.6%, compared to expectations for a rise to 1.4%.

Although bond markets are closely focused on inflation readings this year, price action after the data has been marginal.

By mid-morning, the 10-year yield in Germany, the main benchmark for the eurozone, rose 2 basis points to -0.42%, but remained below last week’s high of -0.401pc.

The Italian 10-year bond yield rose 3 basis points to 0.64%, keeping the closely watched gap with German 10-year bond yields at 105 basis points.

Inflation came above the ECB’s target for the second month in a row and is expected to rise further in the remainder of this year. But this is largely seen as a temporary increase driven by transitional factors, and policymakers argue that it will remain well below the bank’s target for years to come.

Ludovic Colin, portfolio manager at Vontobel Asset Management, said the European Central Bank’s new 2% symmetric inflation target, which allows for temporary excesses, is keeping markets calm.

« The market is saying we may see 2 per cent inflation, but we will never see an average of 2 per cent over a long period of time in Europe, » he said.

« That’s why, even if you get strong inflation numbers in Europe, the chance that it will lead to a massive rise in yield in Europe is very low. »

Data earlier on Tuesday already showed that French inflation came in higher than expected at 2.4 percent on an annual basis, while Spanish inflation exceeded expectations on Monday.

On Monday, data showing German inflation at a 13-year high, in line with expectations, failed to stimulate price action.

In the primary market, the release is rising this week after the summer lull. Commerzbank expects a €29.5 billion issuance in its busiest week since mid-July, although coupon payments and redemptions will offset the show.

On Tuesday, Italy raised 7.75 billion euros from reopening five- and 10-year bonds, along with seven-year floating-rate bonds, with five-year bonds issued at a record low yield of -0.01%.

The Netherlands was to raise up to €2.5 billion from reopening four-year bonds.

Greece has hired a syndicate of banks to reopen the five- and 30-year bonds. The sale is « expected in the near future, » a phrase that debt management offices usually use the day before the sale.