Euro zone bond yields calm after inflation sell-off

Euro zone bond yields calmed on Thursday as energy prices continued to dip, recovering from a sharp sell-off a day earlier that had been driven by inflationary concerns. As gas and oil shot up on Wednesday, bonds sold off and yields, which move inversely with prices, rose sharply as concerns that the price rises would stoke already high inflation drove market-based inflation gauges sharply higher.

Eurozone bond yields calmed on Thursday as energy prices continued to dip, recovering from a sharp sell-off a day earlier that had been driven by inflationary concerns.

As gas and oil shot up on Wednesday, bonds sold off and yields, which move inversely with prices, rose sharply as concerns that the price rises would stoke already high inflation drove market-based inflation gauges sharply higher. But gas and oil prices fell later on Wednesday, helped by comments from Russian President Vladimir Putin and an unexpected rise in U.S. crude inventories.

Democrats in the U.S. Senate saying they might accept a Republican proposal to defuse the partisan standoff that has threatened a U.S. debt default later in October has also helped calm markets. "Bunds are catching their breath after the sharp re-pricing of inflation and rates expectations in recent days," Commerzbank strategists Christoph Rieger and Rainer Guntermann said.

The downward correction in oil and gas futures has helped support German government bonds, they said. Improving risk sentiment due to the U.S. developments should limit downside pressure on Bund yields ahead of Friday's U.S. employment data, they added. By 0712 GMT, Germany's 10-year yield, the benchmark for the euro area, was unchanged at -0.18%, below the highest since end-June at -0.147% hit on Wednesday.

Italian bonds, which underperformed on Wednesday, were outperforming on Thursday with the 10-year yield down 2 bps to 0.87%. That pushed the closely watched gap between 10-year Italian and German bond yields down to 104 bps, from Wednesday's one-week high at 108 bps.

Focus is on the European Central Bank on Thursday, which will release its September meeting accounts at 0930 GMT. Speeches by chief economist Philip Lane from 0830 GMT as well as executive board member Isabel Schnabel at 1300 GMT will also be watched. The ECB is studying a new bond-buying program to prevent market turmoil when its pandemic emergency bond purchase program (PEPP) expires next year, Bloomberg News reported late on Wednesday, citing sources.

The potential new program would replace the PEPP as well as the ECB's conventional bond purchases and it would circumvent rules that govern how much of each country's debt the ECB would buy, the report said, adding that no decision has been made. In the primary market, Spain and France will sell long-dated debt at auctions.

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