| LONDON, March 26
LONDON, March 26 Euro zone bond yields nudged
higher on Wednesday after signs of recovery in the U.S. economy
dented fixed income demand, but the rise was tempered by
expectations of monetary stimulus from the European Central
Private sector data on Tuesday showing U.S. consumer
confidence hit a six-year high in March suggested the world's
biggest economy was gaining momentum after being held back by
severe weather. This has prompted a rebound in equity markets to
the detriment of low-risk government bonds.
Easing tensions between Russia and the West after the two
sides drew a line under Moscow's annexation of Ukraine's Crimea
region also blunted investor appetite for bonds.
Spanish and Italian 10-year yields were 1.5 basis points up
at 3.34 percent and 4.24 percent respectively
while German yields, the yardstick for euro zone borrowing
costs, were a touch higher at 1.58 percent.
"The market is still mulling yesterday's U.S. data and risk
appetite has improved and that has taken the shine off bonds,"
said Nick Stamenkovic, a strategist at RIA Capital Markets.
"But the 10-year Bund yield is very close to the lower end
of its recent trading range, while the short end remains
supported by recent dovish ECB comments."
ECB President Mario Draghi and Bundesbank President Jens
Weidmann said on Tuesday that fresh stimulus from the central
bank, including quantitative easing (QE), was not out of the
question as the euro zone battles with deflationary pressures.
The Bundesbank has previously expressed scepticism about
such measures. The ECB's next policy meeting comes next week.
Market focus is now largely on German inflation data due on
Friday. If this points to euro zone inflation remaining very
subdued, it could increase pressure on the ECB to act sooner
rather than later.
But despite Weidmann's comments, some said they still saw
ECB asset purchases to support the economy as a last resort.
"Mr Weidmann's comments yesterday were superficially
positive about QE. They have not changed our view that QE is an
absolute last resort - rather we view the comment as an
indication that easier ECB policy remains on the table," RBS
strategists said in a note.
(Editing by Gareth Jones)