Euro zone bonds steady after German inflation, rate-cut comments

German annual consumer prices turned positive and rose by more than expected in January, the Federal Statistics Office said, attributing a rise in the minimum wage as one possible explanation for the increase. By 1321 GMT, Germany's 10-year yield, the benchmark for the region, was down less than one basis point at -0.558% and remained at close to a three-week low.

Euro zone bonds barely moved on Thursday after data showed a jump in German inflation in January, while investors brushed aside rhetoric from the European Central Bank drawing attention to interest rate cuts. German annual consumer prices turned positive and rose by more than expected in January, the Federal Statistics Office said, attributing a rise in the minimum wage as one possible explanation for the increase.

By 1321 GMT, Germany's 10-year yield, the benchmark for the region, was down less than one basis point at -0.558% and remained at close to a three-week low. Analysts had expected little market reaction to the data, as the inflation reading was forecast to rise back to positive territory due to the expiry of a value-added tax cut Germany implemented in July, a mechanical driver rather than a fundamental improvement in economic conditions, as well as higher energy prices.

"The numbers are higher than expected but the focus right now is elsewhere, specifically the risk off momentum that has been spreading during the course of the week has given bunds a lift," said Christoph Rieger, head of rates and credit research at Commerzbank. "And the other factor I would say is related to this solid demand for primary market issues," he added, referring to a flurry of recent bond deals from European governments.

Focus was also on Wednesday's statement from ECB governing council member Klaas Knot, who said the ECB was ready to cut its deposit rate further below zero if necessary to keep its inflation target in sight. His words were in particular focus as he is considered a hawkish member of the council. That was followed by a story by Bloomberg News that reported policymakers were uncomfortable that investors were largely ruling out further rate cuts, and have agreed to emphasize that it remains a viable option, citing unnamed officials.

The report also said, however, that officials are not currently considering a rate cut in the near future. German 10-year bond yields briefly fell to three-week lows on Wednesday, but later retraced those moves.

Money markets have also largely dismissed the comments, pricing around a 50% chance of a 10-basis-point rate cut from the ECB in September. In the primary market, Italian borrowing costs rose to a three-month peak after the resignation of Prime Minister Giuseppe Conte deepened the country's political crisis.

Italy's 10-year yield was last unchanged at 0.65%.

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