April 30, 2018 / 11:03 AM / a month ago

UPDATE 1-Euro zone bond yields creep up, German, Italian inflation data caps rise

* Euro zone bond yields up 1-2 bps on day

* German Bund yields set to end April 9 bps higher

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates throughout)

By Dhara Ranasinghe

LONDON, April 30 (Reuters) - Government bond yields in the euro area nudged up on Monday, reversing some of the sharp falls seen late last week, with bigger rises limited by further signs that inflation in the bloc remains subdued.

Annual inflation in four German states was steady in April, regional data showed on Monday, suggesting price pressures in Europe’s largest economy are stable.

In Germany’s most populous state, North Rhine-Westphalia, annual inflation slowed to 1.5 percent in April from 1.6 percent the previous month, the data showed. Yearly consumer price inflation was unchanged in the states of Baden-Wuerttemberg, Bavaria, Hesse and Brandenburg.

Data from Italy meanwhile showed annual inflation slowed to 0.6 percent in April from 0.9 percent in March.

The inflation numbers from two of the euro zone’s biggest economies points to the challenge the European Central Bank (ECB) faces in seeking to meet its target of inflation just below 2 percent in the euro zone as a whole. The flash estimate of euro zone inflation in April is due out on Thursday.

“The German inflation data suggests another subdued inflation reading for the euro zone later in the week,” Commerzbank rates strategist Rainer Guntermann said.

“We think the core euro zone number could slip below 1 percent, which may cause a headache for the ECB’s exit strategy,” he said, referring to the central bank ending its policy of injecting new money into the economy, known as quantitative easing.

Benchmark 10-year bond yields were 1 to 2 basis points (bps) higher as stock markets rallied and last week’s historic summit between North and South Korea eased concerns about tensions on the Korean peninsula, denting the appeal of safe-haven bonds.

A softening in euro zone economic data and signs that inflationary pressures remain subdued, encouraging the ECB to hold off from raising interest rates until well into 2019, have supported bond markets in recent weeks.

German monthly retail sales unexpectedly fell in March, data showed on Monday, marking a fourth consecutive drop.

“The soft tone of today’s inflation data coupled with the recent dip in the activity surveys appears to justify the ECB’s latest decision not to make any major changes in its forward guidance for now,” Capital Economics chief European economist Jennifer McKeown said.

Still, a sell-off in the U.S. Treasury market that pushed 10-year Treasury yields briefly above 3 percent last week has weighed on euro zone bond markets this month.

Germany’s 10-year bond yield was 1 bps higher at 0.58 percent, above a one-week low of 0.56 percent hit on Friday. It was poised to end April up 9 bps, the first monthly rise since January. (Reporting by Dhara Ranasinghe)

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