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Bonds News

UPDATE 3-Euro zone bond yields hit six-week highs as ECB unease lingers

(Adds comments from analyst and ECB’s Lagarde)

LONDON, Sept 1 (Reuters) - Government bond yields across the euro area touched their highest levels in around six weeks on Wednesday, pushed up by hawkish rhetoric from policymakers that stoked unease over the future pace of European Central Bank bond purchases.

Borrowing costs across the bloc shot up on Tuesday as news that euro area inflation surged to a 10-year high in August and hawkish comments from European Central Bank policymaker Robert Holzmann unnerved investors.

The ECB’s Klaas Knot said late on Tuesday he expected the ECB to start reducing the pace of its emergency bond purchases at next week’s meeting, with a view to ending them in March.

Bundesbank President Jens Weidmann followed on Wednesday, saying euro zone inflation is at risk of overshooting the ECB’s projections as the temporary factors behind its recent spike could seep into underlying price growth.

ECB President Christine Lagarde in an interview published on Wednesday said the euro zone economy was recovering from the coronavirus pandemic and only needed “surgical” support targeted at sectors that are still struggling.

Despite the comments, Pooja Kumra, European rates strategist at TD Securities, expects the ECB to keep the bond buying pace “extremely supportive”.

“For them, maintaining favourably financing conditions is important so I would not expect any drastic cuts in the pace of purchases. They will still be able to absorb most of the supply given the fact that most of the European governments are well-funded.”

Bond markets, while calmer, remained on edge.

Germany’s 10-year yield touched its highest level in just over six weeks at -0.354%. It was last up 1.4 basis points at -0.366%.

The German 10-year inflation-linked bond yield rose to a five-week high at around -1.781%.

Italy’s 10-year bond yield rose to 0.729%, also briefly hitting its highest in around six weeks. It was last unchanged at 0.70%.

“The fact that you can interpret inflation in two different ways means you see a growing gulf in opinion open up between central bankers,” said Richard McGuire, head of rates at Rabobank.

The ECB and the Federal Reserve have argued that the upward rise in price pressures will likely prove temporary.

But there is also an argument that the rise in inflation, boosted by massive fiscal stimulus and exacerbated by supply bottlenecks, could continue and no longer justifies massive monetary stimulus.

“I think the ECB is still convinced that inflation is transitory,” said Eric Vanraes, a portfolio manager at Eric Sturdza Investments.

“In the ECB mind’s, higher inflation should be introduced by higher wages all over Europe but I don’t think that’s possible.”

Focus was also on syndicated debt sales in the primary market. Germany received over 18 billion euros ($21.3 billion) of investor demand for a new, 5.5 billion euro 30-year bond, and Greece raised 2.5 billion euros from the re-opening of five and 30-year bonds, receiving over 18.9 billion euros of demand.

Reporting by Dhara Ranasinghe and Ritvik Carvalho in London; Editing by Bernadette Baum and Mark Potter

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