LONDON, Nov 30 (Reuters) – Euro zone bond yields rose slightly on Wednesday as investors digested lower inflation in the single-currency bloc, after falling sharply yesterday amid local data from Germany and Spain.
The year-on-year inflation rate in the euro zone slowed to 10% in November, according to a preliminary reading, down from 10.6% in October and below expectations for a figure of 10.4 %.
Yet core inflation, which excludes volatility in energy and food prices, remained at a record high of 5%.
Germany’s 10-year government bond yield, seen as a benchmark for the bloc, was little changed after the data was released and last rose 2 basis points (bps) to 1.933%.
The yield fell 8 basis points on Tuesday after inflation data from Germany and Spain came in below expectations, leading investors to expect the euro zone to decline on Wednesday. Yields move inversely to prices.
With the headline inflation rate down but the core reading remaining elevated, the eurozone data leaves a lot of questions unanswered, said Mauro Valle, head of fixed income at Generali Investments Partners.
“There is no clear direction,” he said. “(Market) sentiment is quite mixed at the moment.”
Eurozone bond yields have soared this year as the European Central Bank (ECB) raised interest rates to rein in inflation, prompting investors to demand higher yields on government debt . Germany’s 10-year yield started the year around -0.2%, but hit an 11-year high of 2.532% in October.
Economists said signs of a reversal in inflation could lead the ECB to raise rates by 50 basis points in December, following two consecutive increases of 75 basis points.
Commerzbank and ING both said the data raised the odds of a hike by 50 basis points. Consulting firm Capital Economics said there was still a draw between 50 and 75.
“It’s very tight,” Valle de Generali said. “There are a lot of factors, there is a lot of dependence on energy prices.”
The German 2-year yield, more sensitive to ECB interest rate expectations, rose 3 basis points to 2.128% on Wednesday, a level around which it has been hovering since late October.
Italy’s 10-year yield was up 3 basis points to 3.851%. This took the spread between German and Italian 10-year yields to 190 basis points.
Investors were also expecting a speech from Fed Chairman Jerome Powell at the Brookings Institution on the economic outlook, scheduled for 6:30 p.m. GMT.
Global bond yields have fallen sharply since data earlier this month showed US inflation was below expectations in October, raising hopes that the Fed’s aggressive rate hikes may soon end.
Still, ING rates strategist Antoine Bouvet warned that Powell could trigger lower bonds and higher yields by spurning those hopes.
Reporting by Harry Robertson; Editing by Toby Chopra
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