Euro zone bonds calm ahead of ECB, attention on US inflation

AMSTERDAM: Euro zone bond yields rose on Wednesday, with the market's focus mostly on a benchmark bond auction and inflation report out of the United States, a day ahead of the bloc's central bank meeting.

Euro area government bonds have calmed in recent sessions, after the German 10-year benchmark saw its worst performance in years alongside many other government bonds in February, pulled up by rising US Treasury yields on bets that a vast stimulus package would reawaken inflation.

Though the rise in European yields is seen as less justified given a weaker economic outlook, euro area yields closely track moves in the United States, so attention remains on market moves and data there that might break the calm.

On Wednesday, euro area yields -- which move inversely with prices -- were higher, with Germany's 10-year yield up about a basis point to -0.30% at 1137 GMT, outperforming Treasuries, where yields rose more.

Euro area government bonds held a dovish tone ahead of Thursday's European Central Bank policy meeting, where focus will be on the bank's messaging after it did not raise its emergency bond purchases during the recent sell-off.

But, despite the lack of direct intervention, verbal intervention appears to have helped. Germany's inflation-adjusted "real" yields -- which cause worry when they rise as this tightens financial conditions -- have fallen since ECB chief Christine Lagarde said the bank is closely monitoring the rise in bond yields the week before last and various other policymakers weighing in.

"In real terms, verbal intervention was enough. Financial conditions haven't really tightened. The ECB should be happy," Anders Svendsen, chief analyst at Nordea told clients.

Still, Germany's real yield, while deeply negative, is about 20 basis points higher than it was at the start of February.

On Wednesday, focus was on the US February inflation reading due at 1330 GMT given the recent bond sell-off. A Reuters poll expects inflation to rise to 1.7% year-on-year from 1.4% in January, though a core reading that excludes food and energy is expected to stay unchanged at 1.4%.

"Today's macro focus should be on US CPI in the afternoon, which should soothe inflation concerns with core inflation not yet picking up and our economists looking for a below-consensus reading," said Michael Leister, head of interest rates strategy at Commerzbank.

But Mizuho analysts said that a significant upside inflation surprise would be hard for the market to ignore.

The inflation reading comes as the US Treasury holds a 10-year bond auction, after a three-year sale was well received on Tuesday, in contrast to recent sales that saw poor appetite.

In the euro area primary market, Portugal raised 1.25 billion euros from an auction of bonds due 2027 and 2030, with the yield turning positive on the 10-year sale. Germany raised 3.26 billion euros from a five-year auction.