LONDON: Euro zone government bond yields dropped back towards multi-month lows on Wednesday after the European Central Bank distanced itself from one of its governing council member's comments about a move away from deeply negative deposit rates.
Ewald Nowotny told Reuters on Tuesday there was a possibility of a 20 basis-point hike in the deposit rate as part of ECB efforts to normalise policy. But a spokesperson said this did not represent the bank's view.,
"(It) ...is a very clear statement that the ECB is in favour of sequencing," said DZ Bank strategist Daniel Lenz, referring to the expected plan that the key rate will remain at its current level until well after the bank ends its bond purchase programme.
Euro zone government bond yields dropped across the board on Wednesday, reversing the previous day's rises.
The yield on Germany's 10-year government bond, the benchmark for the region, was 2 basis points lower at 0.495 percent while some peers across the bloc saw yields drop 1-3 bps.
Euro zone government bonds have been in demand ever since growth in the continent's economy stopped beating forecasts this year, even though it remained healthy.
Trade tensions between the United States and China have kept US Treasury 10-year yields around the 2.80 percent mark, and the German equivalent around 0.50 percent.
Any full-blown trade war would be likely to affect the world economy and upset the plans of major central banks to tighten policy - fuelling demand for government bonds.
With ECB president Mario Draghi giving a speech on Wednesday, investors will be looking for any hints from the bank as to how it views the trade situation, Lenz of DZ Bank said.
"The key is what Draghi's take is on how the trade issue could be a risk for economic recovery. Seems the latest early indicators are that the economy is already dipping a little bit," he said.
Also on Wednesday, the US reports inflation data for March, with expectations at 2.4 percent based on a Reuters poll.
While this is well above the Federal Reserve's preferred rate, Mizuho head of rates Peter Chatwell said base effects were in play, driven by soft demand, weakness in gasoline and heavy competition in wireless services in March 2017.
"This largely mechanical move higher should mean that an upside surprise will be largely written off as being exacerbated by base effects, while if the data come in line or below, we think there is scope for a short-squeeze (in bonds)," he said in a note.
Also on Wednesday, Portugal was looking to sell 3 billion euros of 15-year bonds through syndication, and had generated over 10 billion euros of demand by midday.
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