Germany's Bund hits 2-year high as inflation expectations rise

LONDON: Euro zone government bonds yields rose on Wednesday, with the benchmark German Bund yield rising to a two-year high in early trading as investors increasingly priced in the possibility of the ECB slowing its bond-buying as the economy recovers.

Euro zone inflation accelerated as expected in April because of a sharp rise in the costs of energy and services, data showed. British consumer price inflation more than doubled in April.

Core government bond yields were up by around 3 basis points in early trading, while Italy's 10-year yield reached its highest since September 2020.

A key gauge of euro zone inflation expectations - the five-year, five-year inflation forward - rose to its highest since December 2018.

The moves follow a big sell-off in euro area government bonds on Monday, driven by speculation that the ECB may slow its emergency bond buying as the economy recovers from the COVID-19 pandemic.

At 1125 GMT, Germany's 10-year bond yield was up 2 bps at -0.089%. Italy's 10-year yield was up 3 bps at 1.123%, having reached as high as 1.16% earlier in the session .

"I actually think that most of the widening (between German and Italian yields) has to do with the backdrop of rising rates_ I think Italy's more vulnerable to this rising rates environment because they just have so much debt to sell," said Antoine Bouvet, senior rates strategist at ING.

US Treasuries were calmer, with the 10-year yield up 2 bps and trading within the month's ranges.

SUPPLY PRESSURE

In terms of issuance, Finland started selling its 3 billion euro ($3.66 billion) 10-year bond via a syndicate of banks. Germany sold 3.36 billion euros of 10-year bonds.

The European Union launched bonds on Tuesday that will complete the bulk of funding for its SURE unemployment scheme.

"Supply pressure is felt a lot more acutely now that there is a growing consensus that the euro rates have touched higher to reflect the economic recovery," said ING's Bouvet.

More supply at a time when buyers are cautious can cause yields to rise because buyers demand a higher yield to compensate for the perceived risk of holding a bond that could lose value due to inflation.

Later in the session the latest FOMC meeting minutes will be published. There are also a number of European Central Bank speakers, including chief economist Philip Lane, who is due to speak at 1550 GMT.