Euro zone bond yields edge down, inflation test looms

Euro zone government bond yields edged down on Monday as the market started the new year on a firm note, with data giving further insight into inflation trends in the currency bloc on the horizon. As attention shifts to signs of a pick-up in price pressures globally, Wednesday’s flash inflation numbers could be a litmus test of sentiment in regional bond markets.

Economists polled by Reuters forecast euro zone inflation to hit the 1 percent year-on-year level in December. Inflation expectations in the euro zone, measured by the five-year, five-year breakeven forward, are near their highest levels in more than a year.

A bounce in oil prices, signs of stronger economic growth and a broader reassessment of the inflation and growth outlook after the election of Donald Trump as U.S. president have all boosted investors’ inflation expectations.

“This week’s expected rise in December inflation to over 1 percent looks set to fuel concerns further over inflation expectations, bond yields and ECB policy, while survey data should confirm robust GDP growth at the end of last year,” analysts at Societe Generale said in a note.

After stronger-than-expected Spanish inflation numbers last week, French and German inflation numbers on Tuesday also have the potential to affect bond markets. Spanish consumer prices rose at their fastest annual pace in almost 3-1/2 years in December, data on Friday showed.

German 10-year bond yields, the benchmark for borrowing costs in the euro area, fell 1 basis point to 0.20 percent but held above a seven-week low hit last week at 0.166 percent . Most other euro zone bond yields were 1-2 bps lower on the day.

News that a gunman opened fire on New Year revellers at a packed nightclub on the shores of Istanbul’s Bosphorus waterway on Sunday killing at least 39 people provided some support to safe-haven bonds, but trading was generally subdued with many markets were closed for a public holiday.

Analysts said they expected bond supply this week to put some upward pressure on yields. France said on Friday it would sell 8.5 billion to 9.5 billion euros ($ 9 billion to $ 10 billion) of long-term government bonds on Thursday. Spain also holds a bond auction on Thursday.

“While net issuance will be negative, plenty of duration has to be digested as the French (treasury’s) heavy ultra-long start into the year pushes risk-equivalent issuance above last year’s weekly average,” said Commerzbank analyst Michael Leister.