German Bund yields rise as deflation fears ease

Benchmark German Bund yields rose above 0.40 percent on Monday to levels last seen before the European Central Bank began buying bonds, reflecting reduced concerns about deflation following improving economic data. A surprise pick-up in German inflation and the first rise in private lending in the euro zone for three years confirmed to some investors that the ECB's trillion euro quantitative easing programme was already having an effect.
On Monday, data showed euro zone manufacturing growth eased in April but factories raised prices for the first time in eight months. Headcount rose at the fastest pace in nearly four years. A shift across European markets last week saw the euro chalk up its biggest rally in 3-1/2 years and the biggest rise in German yields since mid-2013.
"More and more investors are avoiding negative or very low yielding bonds and more and more think that reflation is actually taking place," said Chris Iggo, chief investment officer for fixed income at AXA Investment Managers. "Bank lending in Europe is starting to increase, oil prices have stabilised and US wages are picking up ... Everyone has thought bond yields would rise at some point. Reality check - it might be now."
German Bund yields were up 6 basis points at a day's high of 0.429 percent, also tracking a rise in US Treasury yields after firm US factory data buoyed investor expectations that the world's largest economy will raise interest rates later this year. Bund yields are now higher than the close on March 6, the last trading day before the ECB began buying bonds on March 9. They rose 22 basis points last week alone, having hit a record low of 0.05 percent the week before.
Bund futures fell 73 ticks to 155.97. Volumes were expected to be low due to a market holiday in London, Europe's financial capital. Renewed hopes for a financing deal to keep Greece afloat and in the euro zone have also been cited as a factor behind the surge in German yields. Negotiations between Greece and its international lenders over reforms to unlock remaining bailout aid appear to be making some headway but wide differences remain over pension and labour reforms. ECB Vice-President Vitor Constancio said he was confident a deal will be reached. Other euro zone bond yields were a touch higher. Spanish and Italian 10-year yields rose 1-2 basis points to 1.47 percent and 1.50 percent, respectively.