April 4, 2018 / 7:25 AM / 8 months ago

Euro zone bonds brace for flash inflation data

* Data forecast to show euro zone inflation pick up

* Germany to auction 5-year bonds

* Global trade war fears simmer

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

By Dhara Ranasinghe

LONDON, April 4 (Reuters) - Borrowing costs in the euro area were flat to a touch higher on Wednesday ahead of the first estimate of March inflation in the bloc, a key release for markets as the European Central Bank looks to wind down its massive monetary stimulus.

New bond supply later in the day from Germany, which is scheduled to sell 3 billion euros of five-year bonds, put some upward pressure on bond yields although trade remained relatively subdued in a holiday-shortened week.

The “flash” estimate of euro zone inflation will be released at 0900 GMT and is forecast to have risen to 1.4 percent in March from 1.1 percent in February.

An earlier Easter this year, pushing up prices of package holidays and accommodation in March, cold weather driving up fruit and vegetable prices, and a steeper year-on-year increase in energy costs are all expected to contribute to the inflation pick-up.

Even if inflation remains short of the ECB’s target of near 2 percent, its policymakers are now debating whether to end the central bank’s 2.55 trillion euro asset purchase scheme.

“The cost of living in the currency bloc has been relatively weak, and the report is likely to give the market an indication of what the future policy of the ECB will be,” said David Madden, market analyst at CMC Markets.

“The ECB have a bond buying scheme in place until September, and dealers will taking the cues from the CPI data.”

In early trade, yields on 10-year bonds in the single-currency bloc were up to 2 basis points higher on the day.

Benchmark issuer Germany’s Bund yield hovered just above 0.50 percent, just off 2-1/2 month lows hit last week.

Nagging worries about a global trade war and expectations for a pick-up in ECB reinvestments from maturing government bonds held by the central bank capped a rise in bond yields, analysts said.

ECB estimates show monthly redemptions from government bonds will rise to almost 23 billion euros ($28.5 billion) in April from under 4 billion euros in March.

China meanwhile condemned the United States on Wednesday after the Trump administration pushed ahead with plans to slap tariffs on about $50 billion of Chinese industrial and hi-tech products, and vowed imminent countermeasures.

That weighed on sentiment in world stock markets, in turn supporting demand for safe-haven bonds in top-rated issuers such as Germany.

Reporting by Dhara Ranasinghe Editing by Hugh Lawson

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