German bond falls after 3-week high, focus shifts to inflation

Germany's benchmark 10-year government bond yield nudged down from a three-week high on Thursday, with focus turning to a slew of inflation numbers from the euro zone's biggest economies. Having fallen to more than two-year lows below 0.10 per cent this month, German bond yields rose sharply on Wednesday as receding fears of a no-deal Brexit sparked a sell-off in British gilts that spilled over into other safe-haven bond markets.

"It was quite striking yesterday that the selloff in gilts dragged on the German and U.S. bond markets," said KBC rates strategist Mathias van der Jeugt. "We have inflation readings today and expect some firmer numbers. That means the market will test higher levels on yields ahead of next week's ECB (European Central Bank) meeting," he added.

French inflation picked up slightly in February, although by not as much as expected, according to preliminary EU-harmonised data released on Thursday. French inflation rose to 1.5 per cent from a year earlier, compared with 1.4 per cent in January and market expectations for a rise to 1.7 per cent.

A flash estimate of eurozone inflation data is due out on Friday. Eurozone bond yields extended early falls after the data, with most 10-year bond yields down 1-2 basis points on the day.

Germany's 10-year bond yield was down 1.5 bps at 0.14 per cent, below three-week highs hit on Thursday near 0.17 per cent. Global trade tensions and an early end to a U.S.-North Korean summit in Hanoi weighed on global stock markets, supporting demand for safer assets.

U.S. Trade Representative Robert Lighthizer said on Wednesday it was too early to predict an outcome in talks between Washington and Beijing. There was also focus on U.S. economic growth numbers later in the day.

"While a positive reading in inflation will certainly not contribute to lower Bund yields, in the current market context, Bunds are unlikely to take much notice, remaining driven mainly by developments in the global picture and Brexit negotiations," analysts at UniCredit said in a note. Furthermore, safe assets may receive support as U.S. GDP is likely to have slowed in the fourth quarter.