October 31, 2018 / 8:26 AM / 2 months ago

Euro zone bond yields nudge up, flash inflation looms

* EZ flash CPI due, follows strong German inflation data

* Most euro zone bond yields higher as stocks bounce back

* Italian bonds recover, still weakest EZ debt market in Oct

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

By Dhara Ranasinghe

LONDON, Oct 31 (Reuters) - Most government bond yields in the euro area rose on Wednesday, as world stock markets found firmer ground and on expectations that data later this session will likely point to a pick up in inflation in the bloc.

Risk appetite firmed and European equity markets opened one percent higher, lifting sentiment towards Italian bonds and allowing that market to recover from a hit the previous session from weak economic growth data.

Focus turned to a “flash” reading of euro zone inflation in October. Economists polled by Reuters expect headline inflation rose 2.2 percent in October after a 2.1 percent rise in September.

Data on Tuesday showed German annual inflation picked up in October to reach its highest level in more than 6-1/2 years. The impact of those numbers, however was offset by weak Italian and euro zone economic growth numbers.

French consumer prices rose 2.5 percent in October, just shy of the highest inflation level since March 2012, data on Wednesday showed. That number was just below analyst expectations.

“Generally speaking, bond markets are following the stronger mood music in equity markets,” said Chris Scicluna, head of economic research at Daiwa Capital Markets in London.

“The expectation is for an increase in the headline and core measure for euro zone inflation.”

Most 10-year bond yields across the bloc were up 1-2 basis points on the day.

Germany’s 10-year bond yield was up 2 bps at 0.39 percent , pulling further away from seven-week lows hit last week at around 0.34 percent.

It was set to end October down around 10 bps - reflecting concern about volatility in Italy, a major selloff in world stock markets and growing worries about the economic growth outlook. “If you would have told me at the start of 2018 that Bund yields would be where they are today, I would said you are crazy,” said Brian Giuliano, vice president, portfolio management for fixed income at Brandywine Global in Philadelphia. “One reason for this fall in yields is that growth has come off throughout 2018, another is the populist challenges in countries such as Italy.” Italian bond yields, while lower on Wednesday, were set to end the month around 30 bps higher - marking Italy out as the weakest euro zone bond market. Italy’s 10-year bond yield was last down 6 bps at 3.42 percent, while the gap over German Bund yields tightened to 303 bps from 306 bps late Tuesday.

Reporting by Dhara Ranasinghe Editing by Andrew Heavens

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