German bond yields headed for their first weekly fall in five weeks on Friday as the market focused again on central banks' continued use of heavy stimulus, which is helping to bring stability after weeks of violent price swings. The first fall in German business morale in seven months, albeit a shallower dip than forecast, supported demand for government bonds.
Greece was the exception in the European bond market, as its yields rose after the latest talks with creditors failed to deliver any solution to its debt crisis.. But German 10-year yields, the benchmark for euro zone borrowing costs, led other euro zone bond yields down, steadying after a dramatic sell-off that has driven up Bund yields some 55 basis points from a record low of 0.05 percent in mid-April.
European Central Bank policymakers helped halt that sell-off earlier in the week, with Executive Board member Benoit Coeure saying the bank would accelerate its bond buying in the next six weeks, anticipating a decline in liquidity over the summer. German 10-year yields were 3 basis points lower on the day at 0.60 percent, with French and other top-rated European bond yields down a similar amount. Italian and Spanish equivalents were steady to a touch lower on the day.
"We see some weaker data that may give a little bit of support to the ongoing QE and (the view) that there's still room left for more expansionary policy," said DZ Bank strategist Christian Lenk. Although US figures showed core inflation picked up slightly in April, a batch of other weaker-than-expected economic reports this week have raised further questions on whether the Federal Reserve will raise interest rates this year.
A speech by Fed Chair Janet Yellen at 1700 GMT was likely to offer a further steer on the policy outlook after Fed minutes appeared to push the prospect of a first rate hike out to late 2015. ECB Chairman Mario Draghi said in Portugal that the euro zone's economic prospects were better than at any point over the past seven years, but growth was set to remain below pre-crisis levels.
Investors are still nervous after weeks of volatility that have prompted many investment banks to raise their forecasts for German Bund yields in 2015, with some citing rising expectations of an increase in euro zone inflation since the ECB embarked on its QE programme. "There has been a bit of a focus on the Coeure comments. We think that, as long as inflation expectations don't fall, any rally (in prices) will be short-lived," said Rabobank strategist Lyn Graham-Taylor.
Greek bonds remained under pressure, with two-year yields rising 75 bps to 24 percent as European leaders told Athens to return to the negotiating table for "intensive work" to wrap up a reform agreement before cash runs out. Greek officials say it could default in as little as two weeks after technical-level talks with its European Union and International Monetary Fund creditors reached an impasse this week.
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