Euro zone bond yields rise as Fed signals taper coming

Most 10-year euro zone bond yields were 1-2 bps higher on the day. In a slightly hawkish tilt, the Fed said on Wednesday it will likely begin reducing its monthly bond purchases as soon as November and signalled interest rate increases may follow more quickly than expected.

Eurozone government bond yields rose on Thursday as the Federal Reserve signaled it would likely begin reducing monthly bond buying as soon as November, Norway lifted rates and a rally in stocks dented the appeal of safe-haven debt. Business activity data showing input prices in the single-currency bloc at a two-decade high in September only added to the upward pressure on yields, pushing prices down.

But the bond selloff was modest, with Germany's 10-year Bund yield last up 2 basis points on the day at -0.31%. "The Fed is clear that it's on the tapering path, and there is some relief on Evergrande which is why stocks are rallying," DZ Bank rates strategist Christian Lenk said, explaining the weakness in bond markets.

Stock markets have been calmed after China injected fresh cash into its financial system ahead of an $83.5 million Evergrande bond coupon deadline that could be the start of one of the world's largest-ever corporate defaults. Most 10-year euro zone bond yields were 1-2 bps higher on the day.

In a slightly hawkish tilt, the Fed said on Wednesday it will likely begin reducing its monthly bond purchases as soon as November, and signaled interest rate increases may follow more quickly than expected. The Bank of England, which announces its latest rate decision later in the day, was also in focus as a surge in gas prices challenges the view that a jump in inflation is temporary.

IHS Markit's eurozone Flash Composite Purchasing Managers' Index, a good gauge of overall economic health, fell to a five-month low of 56.1 in September from 59.0 in August. A sub-index tracking input costs hit 70.5, its highest in more than two decades.

That suggests supply distortions - one of the primary drivers of prices throughout the globe over past months - are far from resolved and the trend of higher inflation is here to stay at least for a few months to come. "Price pressures remain intense and sky-high energy prices suggest that these are unlikely to ease any time soon," Jessica Hinds, Europe economist at Capital Economics said in a note.

European Central Bank policymakers speaking earlier this week said they still see the recent inflation surge as temporary but acknowledge the risk that price growth may exceed their relatively benign projections. The focus was expected to turn later in the day to the allotment of cheap ECB funding under the Targeted Longer-Term Refinancing Operations (TLTRO).