Euro zone government bond yields slip

Euro zone government bond yields and implied interest rates slipped on Tuesday, as traders used the latest overnight loan facility figures from the European Central Bank as a trigger to cover short positions built up earlier on the back of growing inflation concerns.
The latest ECB figures showed that a bank or banks borrowed 538 million euros from the central bank on Monday which, on the margins, rekindled some fears about the health of the financial system and prompted investors to push bond and rates futures prices higher.
Analysts were quick to play down the figures, however, pointing out that Monday was a UK and US market holiday and the sum involved has been borrowed several times this year already. "It's much ado about nothing," said David Keeble, head of rates strategy at Calyon.
While recognising that the news is lifting prices, he said: "True, but they are ripe for a rise," noting specifically the surprisingly soft German consumer confidence data released earlier on Tuesday morning. ECB data shows that financial institutions have borrowed over 500 million euros on any given day on at least five occasions this year, often a billion euros or more.
At 0830 GMT the June Bund future was up 15 ticks at 112.98 from Monday's settlement close of 112.83, having fallen as much as 20 ticks in earlier trade. Euribor rates futures also turned tail to trade up two basis points across the 2008 strip. Two-year cash yields were at 4.20 percent, down over a basis point late on Monday. Ten-year yields fell two basis points to 4.275 percent, moving further away from last week's high of 4.322 percent, a level not seen since January 2.
GERMAN DATA IN FOCUS Earlier on Tuesday, fixed income markets had oscillated as investors grappled with worries over oil price-led inflation and surprisingly soft German consumer confidence data.
Oil remained within a couple of dollars of its record peak of $135.09 a barrel struck last week, which continued to stoke inflation fears ahead of German and euro zone consumer price indices due out later in the week. But Bund and rates futures got some respite after German consumer sentiment measured by the GfK index for June showed a surpisingly steep fall to 4.9 from a downwardly revised 5.6.
"It was a weak number, and it's probably the first weak German number we've had for a while," said one European bank trader of the GfK index. Alexander Koch, economist at Unicredit in Munich, agreed that elevated oil prices and rising inflationary pressures were negative signals for bonds because of their likely impact on consumers, businesses and ultimately growth.
Futures markets expect the European Central Bank to raise rates by a quarter point before the end of the year to 4.25 percent, although many analysts say this is wishful thinking, despite the hawkish rhetoric coming out of Frankfurt.