Eurozone bond yields up, ECB policymakers upbeat on inflation

LONDON: Borrowing costs in eurozone crept up yesterday, pushing off multi-week lows after upbeat comments on the euro zone inflation outlook from three European Central Bank (ECB) policy makers at the weekend.

Still, trading was subdued and the rise in bond yields limited ahead of this week’s US Federal Reserve meeting, which is expected to end with a rate rise.

A broadly positive picture of the inflation outlook was painted by Francois Villeroy de Galhau, Klaas Knot and Jens Weidmann on Sunday, cementing market expectations for the ECB to wind down its 2.55 trillion euro bond buys this year and start raising interest rates in 2019. “We are making progress on the inflation front ... although a bit slower than we had expected,” French central bank governor Villeroy de Galhau said before attending a G20 summit in Buenos Aires.

Ten-year bond yields in eurozone were up 0.5 to 1.5 basis points in early trade, although the limited rise suggests markets still anticipate a very slow unwinding of ECB stimulus given benign inflation.

Eurozone consumer prices grew by a slower-than-expected 1.1% last month, data last week showed. A gauge of the market’s longterm inflation expectations on Friday fell to its lowest level in more than three months below 1.69%. “The comments over the weekend, were from policymakers already in the hawkish camp,” said Mathias van der Jeugt, a rate strategist at KBC. “The subdued market reaction shows that the dovish message from the ECB at its last meeting remains the main view and the weekend remarks highlight the divergence on the governing council.”

Bond yields fell sharply last week after ECB officials including central bank chief Mario Draghi suggested asset buys will only end when the ECB is satisfied that inflation is on a sustained path towards its near 2% target. — Reuters