Eurozone yields near 2-month highs ahead of German inflation data

Eurozone government bond yields rose across the board on Thursday ahead of a set of German inflation data that is expected to be exceed the European Central Bank target for the second month in a row. Even so, government yields overall have risen significantly, suggesting that growth and inflation expectations are high.

Eurozone government bond yields rose across the board on Thursday ahead of a set of German inflation data that is expected to exceed the European Central Bank target for the second month in a row. With the global economy on the mend, investors are on the lookout for any signs that central banks worldwide may start scaling back the extraordinary stimulus that has been flowing into the economy since the start of the COVID-19 crisis.

Several German states have already reported inflation of around 2%, suggesting the figure for the whole country -- due out at 1200 GMT -- could also be around that level. A Reuters poll suggests April inflation will be at 2%. The ECB targets eurozone inflation of "just below 2%".

"While there may be temporary factors influencing inflation over the next few months, there's no doubt in anyone's mind we are at the beginning of the growth cycle," said ING rates strategist Antoine Bouvet. "It's absolutely logical for yields to keep rising." German 10-year bond yields were up 2.2 basis points at -0.21%, within a whisker of a two-month high of -0.203% hit in the previous session.

Other eurozone government bond yields were also up 2-3 basis points. A market gauge of long-term eurozone inflation expectations was up to 1.5355% on Thursday, up from 1.519% the day before.

The possibility of a tapering of bond purchases from the U.S. Federal Reserve had sparked a sharp selloff in the world's major government bonds -- including in the eurozone -- in recent weeks and especially on Wednesday. But investors received some reassurance from Fed Chair Jerome Powell after the conclusion of a meeting of rate-setters on Wednesday that the U.S. Federal Reserve would not imminently reduce its support of the U.S. economic recovery.

In addition, German job market data was disappointing, suggesting another setback for recovery hopes. Even so, government yields overall have risen significantly, suggesting that growth and inflation expectations are high. Germany's 10-year yield, for example, is up around 40 bps this year to date.

"But the direction of travel is very clear. The recovery is gaining in momentum and so is inflation," said Bouvet. Other countries are also due to report inflation data this week while an overall eurozone number is due out on Friday.