Euro zone bond yields rise as data lifts hopes of brighter outlook

LONDON: Germany's 10-year government bond yield rose to a one-week high above zero percent on Tuesday, following stronger-than-expected euro zone economic growth data and as inflation in the powerhouse German economy accelerated.

Gross domestic product in the 19 countries sharing the euro rose 0.4 percent quarter-on-quarter in the first three months of 2019, up from 0.2 percent in the fourth quarter of 2018 and 0.1 percent in the third.

Spain's economy, the fourth biggest in the bloc, expanded a stronger-than-expected 0.7 percent in the first quarter, while euro zone unemployment dipped in March.

Annual inflation in Germany meanwhile picked up to 2.1 percent in April, exceeding the European Central Bank's near 2-percent target for the first time since November.

The number was stronger than a market consensus forecast of 1.7 percent and followed solid inflation numbers from the German regions earlier in the session.

"The (inflation) data did surprise to the upside and comes on the back of what was a decent Q1 GDP number for the euro zone this morning and a fall in unemployment," said John Davies, G10 rates strategist at Standard Chartered Bank in London.

"So all-in-all a good basket of data and it's almost surprising that the Bund yield has not responded more, which shows how entrenched the growth and inflation pessimism has become."

Most euro zone 10-year bond yields were 3-4 basis points higher on the day, led by Germany.

Germany's 10-year government bond yield rose five bps to a one-week high at 0.051 percent, set for its biggest one-day jump in more than two weeks.

A key gauge of long-term inflation expectations rose to a five-week high, just above 1.42 percent, after the state inflation data.

"The inflation data is clearly on the firmer side," said Richard McGuire, head of rates strategy at Rabobank in London.

"It is adding to pressure on core paper, which was emerging yesterday as markets welcomed the lack of rating downgrade for S&P on Italy and the fact that there was not a better showing for the far right in Spain's election at the weekend."

S&P Global on Friday maintained Italy's BBB credit rating, helping narrow peripheral bond spreads over benchmark Germany on Monday.

Relief on the ratings front allowed Italy to sell the top planned amount in bonds at an auction on Tuesday, paying the lowest 10-year yield in a year.

Italy's 10-year bond yield, was down 1.5 bps at 2.57 percent , also pushed lower by positive news for the Italian economy.

It grew slightly more than expected in the first quarter of the year, lifting the country out of its third recession in a decade.