Euro zone bond yields edge lower after ECB meeting

MILAN: Euro zone government bond yields edged lower on Friday after the head of the European Central Bank stressed that any discussion about phasing out the emergency bond-buying program was premature.

Some analysts continue to see what they call a possible "hawkish mistake" in June by the ECB following a rebound in the European economy as pandemic restrictions are lifted. Friday's data gave mixed signals.

IHS Markit's flash Composite PMI Index, seen as a good guide to economic health, rose to 53.7 from March's 53.2, confounding expectations in a Reuters poll for a dip to 52.8.

"I am pretty surprised with this muted reaction to PMI data. There is a global risk factor weighing on the mood, mostly Covid. But I think it's just a matter of time before we see rich rises," said Antoine Bouvet, senior rates strategist at ING.

An ECB survey forecast that the euro zone economy would grow more slowly this year than earlier thought. Meanwhile, a temporary surge in inflation is likely to exceed a previous projection.

The ECB left policy unchanged at its meeting on Thursday, keeping copious stimulus flowing even as it predicted a recovery in the eurozone economy in coming months.

Germany's 10-year government bond yield, the benchmark of the euro area, fell 1 basis point at -0.27%.

The ECB meeting served as more of a placeholder before the June decision, "when the Governing Council will decide whether to maintain the new faster pace of PEPP (Pandemic Emergency Purchase Programme) purchases," Deutsche Bank economists said.

"We continue to lean in favour of higher yields and curve steepeners", as ECB President Christine Lagarde underscored that pandemic trajectories are the key drivers of policy shifts, UBS analysts said.

"We are unlikely to see 10Y Bunds trading outside of their well-established range between roughly -0.35 and -0.20%," Unicredit analysts said in a research note.

"We also expect spreads within the euro area to hold relatively stable prior to the next top event, namely the FOMC-meeting next Wednesday," they added.

The Federal Reserve has promised to keep interest rates unchanged until the economy reaches full employment, with inflation also moderately exceeding a 2% target.

Italy's 10-year government bond yield was flat at 0.76%, while the spread between German and Italian yields widened 0.5 basis points to 101.8.

"In addition to a peaceful ECB meeting, this week has renewed our conviction that peripheral spreads are due for another leg of tightening," ING analysts said, mentioning a German court ruling on the EU recovery fund.

Germany's constitutional court declined on Wednesday to block the recovery fund, but it did not indicate when it would rule on the full complaint against the fund.