Bund yields rise as some see euro zone inflation picking up

LONDON, June 30 Mon Jun 30, 2014 4:01am EDT

LONDON, June 30 (Reuters) - German Bund yields edged up on Monday, with euro zone inflation data due later in the day likely to tone down expectations the European Central Bank will launch a large asset purchase programme this year.

Worries about a weakening euro zone growth outlook arising from business surveys last week prompted speculation that such a programme, known as quantitative easing (QE), could be an option for later this year.

However, German inflation topped forecasts on Friday, fuelling expectations that the numbers for the whole of the euro zone, due at 0900 GMT, could rise above the 0.5 percent predicted in a Reuters poll.

Even so, the level of inflation will be low enough for the ECB to keep the door open to further monetary policy easing - a message it is expected to reinforce at its meeting on Thursday.

The central bank cut its interest rates earlier in June and promised more liquidity to banks as it tried to revive lending and growth and bring inflation closer to its target of just below 2 percent.

The ECB's low rates have cut the yields offered by Bunds, pushing investors towards riskier assets, such as peripheral bonds, which outperformed on Monday.

German 10-year Bund yields rose 1 basis point to 1.27 percent, having bounced off one-year lows of 1.24 percent hit last week after the sub-par purchasing manager data.

"The slight weakness in Bunds reflects the fact that some investors are positioning ... for the data to be higher than the consensus," said DZ Bank strategist Christian Lenk.

In an interview broadcast on Sunday, Executive Board Member Yves Mersch said the ECB saw no acute risk of deflation, but it did see a long period of low price growth ahead.

Spanish and Italian 10-year yields fell 1 basis point to 2.64 percent and 2.72 percent, respectively, near their record lows.

"The tepid bounce in inflation should underpin the ECB's wait-and-see approach," Commerzbank rate strategists said in a note. "While this should take the edge out of QE hopes, it argues for a stable low yield, low volatility environment in euro bond markets throughout this summer." (Editing by Nigel Stephenson)

FILED UNDER:
A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

Find your dream retirement town

Florida? Hawaii? Reuters has teamed up with Zillow to give you the power to customize a list of your best places to retire.  Video | Full Article