Euro zone bond yields fall after economic data

MILAN: Euro zone government bond yields fell on Wednesday as the bloc's economic data painted a mixed picture, while investors were waiting for Friday's US jobs numbers which could affect the Federal Reserve's policy stance.

Inflation in the 19 countries sharing the euro slipped to 1.9% in June from 2.0% in May, in line with forecasts in a Reuters poll and right on the ECB's target of "below but close to 2%".

According to ING analysts, most of the evidence points to a surge in goods and services inflation "being largely temporary".

Germany's Labour Office said the number of people out of work in June fell by 38,000 in seasonally adjusted terms, while a Reuters poll had forecast a fall of 20,000.

"At first glance, today's numbers suggest that the German labour market has already left the crisis behind. At second glance, however, the high number of short-time workers should still be a good reminder of potential risks going forward, even if these risks look less threatening by the month," they said.

Germany's 10-year government bond yield, the benchmark of the euro area, fell 3 basis points to -0.2%.

US 10-year Treasury yields fell also fell 3 bps to 1.449% despite strong data, as easing inflation fears are keeping yields from climbing, according to analysts.

US private payrolls, an anticipation of Friday's numbers, increased more than expected in June.

In the euro zone investors' "real focus is on US job data due on Friday," Mauro Valle, head of fixed income at Generali Investments Partners, said.

Meanwhile euro zone inflation expectations were back above 1.6%, not far from levels not seen since November 2018 (see chart below).

Italy's government bond yields were outperforming the broader market, with the 10-year yield falling as much as 5 basis points to 0.83%.

Italian bonds were supported by "a well-received BTP auction which took place this morning," Valle said.

Italian 5-year borrowing costs touched their lowest level since March at an auction on Wednesday. A BTP bond due in April 2031 achieved a gross yield of 0.81% compared with 0.83% at an auction in April.

There has also been increasing concern about the economic impact of a possible new wave of the pandemic as the highly infectious Delta variant spreads.

ING analysts argued that euro zone inflation data "in line with consensus will reinforce the ECB's barrage of dovish comments and act to further suppress rates volatility".

However, they expected the main market driver would remain measures taken to slow the spread of the Delta variant.