Euro zone bond yields dip ahead of U.S. inflation data

They have followed U.S. Treasury yields higher as investors bet the U.S. Federal Reserve could hike rates as early as March, with the bank's December meeting minutes showing some policymakers want to move even faster to tighten policy, including by winding down the bank's balance sheet. By 1048 GMT, Germany's 10-year yield was down nearly 2 basis points at -0.05% after rising as high as -0.014% on Tuesday.

Euro zone bond yields dipped on Wednesday as investors cautiously awaited a U.S. inflation reading that may give further clues about the Fed's policy tightening path ahead. Testimony to U.S. congress by U.S. Federal Reserve Chairman Jerome Powell, who said the economy was strong enough to handle the start of tighter monetary policy, sent U.S. Treasury yields falling on Tuesday after the European markets close, perhaps as Powell did not sound more hawkish than market expectations.

That appeared to also remove some upward pressure from euro zone bond yields on Wednesday. Those have also risen sharply since the start of the year. They have followed U.S. Treasury yields higher as investors bet the U.S. Federal Reserve could hike rates as early as March, with the bank's December meeting minutes showing some policymakers want to move even faster to tighten policy, including by winding down the bank's balance sheet.

By 1048 GMT, Germany's 10-year yield was down nearly 2 basis points at -0.05% after rising as high as -0.014% on Tuesday. On Wednesday, market participants' focus was on the U.S. December inflation reading due at 1330 GMT, which is expected to show consumer prices rose 7% year-on-year, according to a Reuters poll.

That reading comes as pressure is on the Fed to raise rates as soon as March following a jobs report last week that underscored a tightening labour market. The month-on-month rise in consumer prices, however, is expected to slow to 0.4% from 0.8% in November.

"A lower month-on-month number should not change much on the pricing of the Federal Reserve as they need more than one number to change their view on quantitative tightening and rate hikes," Allan von Mehren, chief analyst at Danske Bank, said. "Underlying price increases have been higher than estimated for many months now so risks seem skewed to the upside.

"High inflation and a tight labour market with no significant rebound in labour force participation put the Fed under pressure to hike (rates) more." In the primary market, Portugal received 14.5 billion euros for a new 20-year syndicated bond sale, according to two lead manager memos seen by Reuters.

And Germany re-opened a 30-year bond at auction and raised 1.256 billion euros, but the auction resulted in a technical failure as demand was below the 1.5 billion euros it targeted, the second time in a row for 30-year auctions according to Refinitiv IFR.