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UPDATE 2-Euro zone yields steady after inflation-induced spike
January 4, 2017 / 12:31 PM / 8 months ago

UPDATE 2-Euro zone yields steady after inflation-induced spike

(Retops and updates prices)

By Abhinav Ramnarayan

LONDON, Jan 4 (Reuters) - Euro zone bond yields steadied after a recent increase on Wednesday as investors digested more data confirming rising inflation across the region.

Yields jumped nearly 10 basis points on Tuesday after Germany reported consumer prices overall increased more than forecast in December and its Ifo economic institute called on the European Central Bank to end its bond-buying if inflation rose across the bloc.

Data on Wednesday showed euro zone consumer prices rose more than expected in December - 1.1 percent year-on-year, compared with 0.6 percent the month before, overshooting forecasts of 1 percent.

But there was no more upward pressure on yields. Analysts said one reason may have been that most of that increase was priced in after Tuesday's rise and that core inflation, which strips out energy and unprocessed food, was little changed.

"The market, just like the ECB, is looking at whether that inflation is driven by commodity prices or if it is a reflection of economic activity picking up," said Mizuho strategist Antoine Bouvet. "It's only if the economy takes off that we can see a sustained rise in yields."

Overall euro zone inflation seemed to be driven mainly by higher costs of energy. Oil prices have risen steadily over the past year, with Brent crude reaching $55.83 per barrel at 1630 GMT on Thursday, compared with $37.18 a year ago.

ING strategists suggested that Germany's high inflation was just the trigger for a much-needed correction - German government bond yields had dropped as much as 17 bps in the second half of December.

Most euro zone bond yields were flat or slightly higher on the day at 1630 GMT. Germany's 10-year bond, the region's benchmark, saw its yield hold on to all of Tuesday's rise, trading at 0.28 percent.

A key measure of long-term euro zone inflation expectations, the five-year five-year forward rate, rose further on Wednesday, to 1.787 percent, its highest level in over a year.

The European Central Bank targets inflation of just below 2 percent for the single currency bloc.

Euro zone government bond yields are also expected to be affected by upcoming bond issuance, as January is usually a busy month for government borrowers.

On Tuesday, the yield on Ireland's 10-year bond rose 11 bps to 0.89 percent ahead of its sale of 4 billion euros of a first ever 20-year bond on Wednesday. Yields were little changed after the sale.

Rumours of a new syndicated sale of bonds by Portugal pushed that country's 10-year bond yield up 20 bps on Tuesday. The yield shed 1 bps of that rise to 3.93 percent on Wednesday.

For Reuters new Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets (Reporting by Abhinav Ramnarayan, additional reporting by John Geddie; Editing by Mark Trevelyan)

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