Eurozone bond yields at six-week highs; Greek paper draws interest

Government bond yields across the euro area touched their highest levels in around six weeks on Wednesday, pushed up by unease over the future pace of European Central Bank bond purchases.

Borrowing costs across the bloc shot up on Tuesday as news that euro area inflation surged to a 10-year high in August and hawkish comments from European Central Bank policymaker Robert Holzmann unnerved investors.

The ECB’s Klaas Knot said late on Tuesday he expected the ECB to start reducing the pace of its emergency bond purchases at next week’s meeting, with a view to ending them in March.

Bond markets, while calmer, remained on edge as ECB hawks pushed the case for a policy shift.

Germany’s 10-year Bund yield briefly touched its highest level in just over six weeks at -0.365% before steadying at around -0.38%. The German 10-year inflation-linked bond rose to a five-week high at around -1.793%.

Italy’s 10-year bond yield rose to 0.72%, also briefly hitting its highest in around six weeks. It was last trading flat on the day at 0.71%.

“The fact that you can interpret inflation in two different ways means you see a growing gulf in opinion open up between central bankers, and that’s the case on both sides of the Atlantic,” said Richard McGuire, head of rates at Rabobank.

The ECB and the Federal Reserve have argued that the upward rise in price pressures will likely prove temporary.

But there is also an argument that the rise in inflation, boosted by massive fiscal stimulus and exacerbated by supply bottlenecks, could continue and no longer justifies massive monetary stimulus.

Focus was on Germany, which on Wednesday began selling a new 30-year bond via a syndicate of banks.

Germany received more than 18 billion euros ($21.3 billion) of investor demand for the new bond, according to memos from two lead managers seen by Reuters.

News on Tuesday that Germany would launch the bond sale may have contributed to the selloff in bond markets since the supply announcement came earlier than expected, analysts said.

There was also strong interest in five and 30-year Greek bonds being sold by a syndicate of banks on Wednesday, according to a lead manager memo.

Most other 10-year bond yields in the euro area were steady.

Germany Bundesbank President Weidmann is scheduled to speak later in the day.

“Similar to his like-minded friends in the governing council Knot and Holzmann yesterday, he could add to the narrative that fewer asset purchases may be required in Q4 and PEPP purchases won’t be needed after March,” said Commerzbank’s head of rates and credit research Christoph Rieger, referring to the ECB’s emergency stimulus scheme. [Reuters]