European bond prices hold onto this week's inflation-inspired gains

Euro zone bond prices on Thursday held onto most of their recent gains inspired by lower-than-expected European inflation data, and outperformance in Italy saw the spread between Italian and German yields narrow to its tightest in two months.

Euro zone bond prices on Thursday held onto most of their recent gains inspired by lower-than-expected European inflation data, and outperformance in Italy saw the spread between Italian and German yields narrow to its tightest in two months. Germany's 10 year yield was 2.29%, up 2 basis points (bps) on the day, but down 25 bps on the week so far. It hit a near three week low of 2.24% on Wednesday.

Bond yields move inversely to prices. That would be the European benchmark's biggest weekly fall in yield in two months, but there are several potentially market moving events still to come this week, including U.S. payrolls data on Friday.

The fall in yields earlier in the week came after inflation data in Spain, France and Germany all came in lower than expected, concluding in Thursday data that showed Euro zone inflation also eased more than expected. As well as the inflation data, some bond buying had been driven ahead of the month's end this week, said Antoine Bouvet, senior rates strategist at ING.

"Now this rally has been exhausted we're back to being driven by the U.S., with jobs data tomorrow," Bouvet said. As for the ECB, "The main front now is not whether there is a September hike, rather that the ECB will really try to push hard against expectations of rate cuts later in the year," he said.

Markets are currently pricing in roughly 50 basis points more interest rate increases from the European Central Bank. ECB President Christine Lagarde said on Thursday that Euro zone inflation remains too high, so further European Central Bank policy tightening is necessary, even if there is a growing body of evidence that past rate hikes are starting to work.

European bond markets largely shrugged off the U.S. House of Representatives passing a bill to suspend the $31.4 trillion debt ceiling on Wednesday and avoid a catastrophic default, overcoming opposition led by hardline conservatives. Expectations are that the legislation will also be passed by the U.S. Senate.

Italian bonds outperformed and Italy's 10 year yield was down 1 bp on the day, at 4.07% and down 31 bps this week. That meant the gap between Italian and German 10 year yields was 178 basis points, its narrowest since mid March.

Germany's two year yield was down 19 bps on the week, but up 5 bps on the day and Italy's two year yield was down 16 bps on the week and up 2 bps on the day.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)