Euro zone yields tick higher, shrug off inflation data

Euro zone government bond yields rose slightly on Monday as investors tried to gauge the European Central Bank's next move, barely budging when data showed inflation cooled again in July.

Euro zone government bond yields rose slightly on Monday as investors tried to gauge the European Central Bank's next move, barely budging when data showed inflation cooled again in July. Price growth in the single currency area slowed to 5.3% year-on-year in July from 5.5% in June, in line with expectations, figures released on Monday showed.

Core inflation - which strips out volatile food and energy prices - held steady at 5.5%. Economists expected a slight fall to 5.4%. Germany's 10-year government bond yield, the bloc's benchmark, showed little reaction to the data and was last up 4 basis points (bps) at 2.492%, compared to 2.485% beforehand. Yields move inversely to prices.

Separate figures showed that the euro zone economy returned to growth in the second quarter, with a 0.3% expansion. Germany's two-year bond yield, which is sensitive to interest rate expectations, was last up 3 bps at 3.232%. It stood at 3.23% before the data.

The releases came after the ECB raised interest rates to 3.75% last week and said that any future moves would be dependent on economic data. ECB President Christine Lagarde reiterated that message over the weekend.

"There could be a further hike of the policy rate or perhaps a pause," Lagarde told France's Le Figaro newspaper in an interview published on Sunday. "A pause, whenever it occurs, in September or later, would not necessarily be definitive." Italy's 10-year bond yield was last up 2 bps at 4.126% on Monday.

The gap between Italy and Germany's 10-year yields - which is seen as a sign of investor sentiment towards the euro zone's more indebted countries - fell 2 bps to 163 bps. "July's inflation data will have been a disappointment for policymakers as, although headline inflation fell in line with expectations, core inflation was unchanged at 5.5%," said Andrew Kenningham, chief Europe economist at Capital Economics.

"We suspect that services inflation will come down only slowly and will keep the ECB from pivoting to rate cuts until well into next year." Investors were also still digesting the Bank of Japan's tweak to its monetary policy last week, which will allow the 10-year bond yield to rise to 1%.

Japanese investors hold large amounts of foreign debt, and some analysts worry they might reduce their exposure to Europe if higher rates make domestic investments more attractive. The yield on Japan's 10-year government bond rose to 0.612% on Monday, its highest level in nine years.

 

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