Inflation miss kicks Europe bond sell-off into ‘reverse’

German/US yield gap widest

LONDON, Sept 30, (RTRS): Investors headed back into eurozone bonds on Friday after data showed inflation in the currency bloc was lower than expected in September. Yields, which move inversely to prices, fell broadly to reverse a sharp sell-off on Thursday that was prompted by US President Donald Trump’s tax cut plan.

Expectations of a fiscal boost in the United States were countered by underwhelming price growth in the euro area, which at 1.5 percent yearon-year is still well below the European Central Bank’s near 2 percent target.

This may complicate the ECB’s plans to reduce monetary stimulus, a move likely to be announced at its next meeting on Oct 26.

“Investors are waiting for more clarity on the policy front from the ECB and there is some uncertainty on the politics front as well,” Credit Agricole strategist Orlando Green said, referring to Germany’s ongoing effort to form a government after weekend elections.

German government bond yields fell as much as 3 basis points on Friday to 0.45 percent, hitting a two-day low after the inflation data and well off Thursday’s high of 0.518 percent.

The gap between US and German 10-year borrowing costs stretched to its widest since early July showing that US growth and inflation expectations are more positive than for the eurozone for the time being.

Among other eye-catching moves after the inflation data, Portuguese 10-year bond yields fell to their lowest since December 2015, down as much as 4 bps at 2.368 percent .

Italian equivalents hit a one-week low of 2.146 percent .

Investors will be keeping a close eye on developments in the Spanish region of Catalonia, where an illegal independence referendum vote is scheduled to go ahead this Sunday.

“At the moment, there is no significant market impact from the tensions, but if the Catalan police and the Spanish police are standing there in front of the polling stations and discussing whether to block the station or not, this will be an issue,” said Sebastian Fellechner of DZ Bank.