Eurozone bond yields hold near multi-year highs on inflation angst

Eurozone bond yields steadied on Wednesday but remained near multi-year highs as investors continued to digest inflation data which came in much higher than expected a week before a crucial European Central Bank policy meeting.

Eurozone bond yields steadied on Wednesday but remained near multi-year highs as investors continued to digest inflation data which came in much higher than expected a week before a crucial European Central Bank policy meeting. Higher-than-forecast inflation prints from Germany and the eurozone as a whole have sent the bloc's bond yields surging this week.

On Wednesday yields dipped in a sign of market stabilization after two days of hefty rises that have pushed Germany's 10-year yield, the benchmark for the bloc, up 16 basis points this week, already set it for its biggest weekly rise in nearly a month. After rising as high as 1.159% - nearing the strongest since 2014 touched in early May at 1.16% - by 1130 GMT, Germany's 10-year yield was unchanged at 1.13%.

Its two-year yield, sensitive to interest rate expectations, touched a new high in 2011 at 0.53% and was last unchanged at 0.51%. Italy's 10-year yield was similarly unchanged at 3.12% after rising some 23 bps on Monday and Tuesday.

Oil prices remaining far below peaks seen on Tuesday also likely helped stabilize bonds. While money markets have held onto pricing a roughly 40% chance of a 50 basis-point rate hike from the ECB in July, they have moved to price in nearly 120 bps of hikes by year-end.

That compares to 110 basis points last week, following comments from hawkish ECB policymaker Peter Kazimir that he would favor a 50 bps hike in September after 25 bps in July. As the ECB is expected to hike in 25 bps increments, that increase signals that investors are pricing in a growing probability that the ECB might deliver a 50 bps hike at one of its meetings this year.

Focus on Wednesday is on upcoming speeches by ECB president Christine Lagarde, board member Fabio Panetta and chief economist Philip Lane for any further clues on the policy outlook before the bank enters its self-imposed blackout period ahead of its policy meeting next Thursday. In the primary market, Germany saw 15.8 billion euros of demand for a 4 billion-euro reopening of its 30-year green bond through a syndicated debt sale which will close later on Wednesday.