LONDON: Borrowing costs in the euro area fell on Wednesday as the single currency rallied to its highest levels in over three weeks and equities tumbled, allowing regional debt markets to recover some ground after a heavy sell-off in the past week.
Boosted by strong German economic growth data on Tuesday, the euro rose to 1.1853 against the dollar - its highest level since Oct. 20.
Currency strength, which puts downward pressure on inflation, usually bodes well for the bond market.
A market gauge of long-term euro zone inflation expectations pulled back from eight-month highs hit on Tuesday at around 1.70 percent.
"Core bond markets are on a stronger footing and the euro is certainly helping," said Commerzbank rates strategist Rainer Guntermann.
In addition, a fall in US Treasury yields and weaker stock markets lifted demand for safe-haven bonds, such as Germany's. World stocks were set for their longest losing streak in more than six months, pulled down by weaker commodities.
The combination put bond markets on firmer ground even as markets absorbed fresh bond supply. Germany, the euro zone's benchmark bond issuer, sold around 2.5 billion euros of 10-year bonds.
German 10-year bond yields fell 4 basis points to 0.36 percent, their lowest level in almost a week and set for their biggest one-day fall since the European Central Bank meeting on Oct. 26.
Thirty-year German bond yields were down 4.5 bps at 1.18 percent.
Across the euro area, 10-year bond yields were down 1 to 4 bps.
"The fall in yields is reflective of the risk-off mood in equities and commodity markets," said Martin van Vliet, senior rates strategist at ING.
Bond markets had come under heavy selling pressure from a large sale of German bond futures last week, exacerbated by heavy bond supply this week. Investors often push bond prices down, and yields up, to make way for new bonds.
Focus was expected to turn to US inflation data later in the session, especially given a pronounced flattening in the US bond yield curve.
US Treasury two-year note yields touched a nine-year high on Tuesday, while those on long-dated debt fell as the yield curve flattened for a second straight day and investors braced for another Federal Reserve interest-rate rise in December.
Chicago Federal Reserve Bank President Charles Evans said on Wednesday he is worried about a drop in US inflation expectations, and called for the US central bank to respond by flagging the likelihood of higher inflation ahead.
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