Euro zone yields hit two-month highs on report about ECB's inflation view

ECB chief economist Philip Lane revealed in a private meeting with German economists that the ECB expects to hit its 2% inflation goal by 2025, the Financial Times said on Thursday in a report that was partly disputed by the bank. In addition, euro zone inflation for the month of August was confirmed at a 10-year high of 3%, well above the ECB's target.

Eurozone government bond yields reached two-month highs on Friday after a report suggested that the European Central Bank expects to hit its inflation target by 2025, and even a subsequent partial denial did not reverse the move. ECB chief economist Philip Lane revealed in a private meeting with German economists that the ECB expects to hit its 2% inflation goal by 2025, the Financial Times said on Thursday in a report that was partly disputed by the bank.

In addition, eurozone inflation for August was confirmed at a 10-year high of 3%, well above the ECB's target. Eurozone yields were broadly higher on Friday, with Germany's 10-year government bond yield rising 3.5 bps at one point to a new two-month high of -0.277%. It was at -0.283% at 0950 GMT.

"There's a lot of water that needs to flow under the bridge before we get to 2023, let alone 2025," said Deutsche Bank chief strategist Jim Reid. "However, if a path to such a number does appear in their forecasts soon it will impact ECB messaging going forward, which will be important to markets." The ECB's response to inflation is currently one of the most talked-about topics in government bond markets.

The central bank has pumped unprecedented amounts of stimulus into the COVID-19-hit eurozone economy. But recent inflation figures have shown a sharp increase towards its goal, which would normally lead to a tightening of policy. The central bank has been keen to stress it sees consumer price rises - such as Friday's eurozone inflation reading - as temporary and that it would be cautious about withdrawing stimulus as the bloc recovers from 2020's recession, but speculation continues to swirl on the subject.

Other eurozone bond yields were also up 1-3 basis points and also hitting two-month highs in many cases. Later on Friday, the University of Michigan's sentiment index will give a flavor of consumer sentiment in the United States following strong upside surprises in the Philadelphia Fed business outlook survey and U.S. retail sales on Thursday.

U.S. Treasuries remained more or less unchanged on Friday, with 10-year yields flat at 1.33%.

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