September 14, 2018 / 7:32 AM / 2 months ago

Euro zone bond yields creep up, Bund yields hover near 6-week high

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

By Dhara Ranasinghe

LONDON, Sept 14 (Reuters) - Borrowing costs in the euro area crawled higher on Friday, with German bond yields hovering near six-week highs a day after the European Central Bank confirmed that its monthly asset purchases will be halved come October.

Demand for safe-haven bonds such as Germany’s was also dented by hopes for a new round of trade talks between the United States and China and after Thursday’s decisive interest rate hike in Turkey bought some calm to emerging markets.

Analysts said Thursday’s ECB meeting was not as dovish as some in the market had feared, with growth forecasts trimmed rather than cut sharply while the bank also noted a pick-up in wage pressures.

The ECB lowered its growth projections by 0.1 percent for the next two years. It also lowered its underlying inflation forecasts for next year and 2020, while maintaining its overall price growth forecast.

“The ECB staff forecasts showed only a trimming of growth expectations, not the downgrade of risks to the outlook that the market had been told to expect,” said Peter Chatwell, head of rates strategy at Mizuho.

“Our interpretation of the forecasts is that they tell a story of a euro area economy which is still growing comfortably and where headline inflation is likely to remain close enough to target for the central bank to be hiking rates in September 2019.”

Current pricing in money markets suggests the ECB is more likely to raise rates in October next year and almost certainly will have delivered one 10 basis point hike by the end of 2019.

Bond yields across the euro area were a tad higher in early Friday trade.

That included Italy, where yields have tended to move in the opposite direction to those on higher-rated bond markets, especially in recent weeks where worries about the government’s spending plans have weighed on the Italian bond market.

In Germany, the euro zone’s benchmark government bond issuer, 10-year bond yields opened a touch higher at 0.43 percent — keeping six-week highs hit on Thursday in sight.

DZ Bank strategist Andy Cossor said signs of progress on U.S./China trade talks and Turkey’s rate hike, which had boosted demand for risk assets, helped explain the slightly bearish tone in major bond markets.

“Risk factors that have been worrying us, have became less worrying in the last 24 hours,” he said.

Reporting by Dhara Ranasinghe

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