Bonds News

UPDATE 2-German bond yields hover at 6-week highs as broader rise shows signs of easing

* Euro zone periphery govt bond yields (Adds details)

LONDON/MILAN, Aug 14 (Reuters) - Benchmark German government bond yields hovered at six-week highs on Friday as a broader rise in yields led by a selloff in U.S. Treasuries this week showed some signs of easing.

Traders cited some profit-taking in European bond markets after yields hit 2-1/2 month lows earlier this month, with borrowing costs tracking U.S. Treasury yields, which have been driven to new highs by a deluge of debt issuance in the United States.

“The Bund sell-off is assuming a dynamic on its own, triggering bearish spread widening. These phases caused by lopsided positioning adjustments have happened before and were always temporary,” Commerzbank analysts said in a morning note.

The three-day rise in German bond yields started to ease on Friday after they briefly hit a six-week high in early London trading. The yield on benchmark German 10-year bonds softened 1 basis point at -0.425%, having earlier spiked to its highest level since early July at -0.392%.

Still, the benchmark yield was on track to end the week up 9 bps - its biggest weekly rise since the start of June.

Also a broader risk-adverse mood in global markets supported safe haven bonds as stocks are losing ground after lacklustre Chinese macro data which dampened hopes of a quick economic recovery from the coronavirus crisis.

Riskier Italian and Spanish yields edged lower, down nearly one basis point each on the day.

Spreads between core and riskier bonds widened slightly - but remained narrower than in March, April and May. The European Central Bank’s asset purchases, as well as the European Union’s plan for a coronavirus recovery fund, have helped keep spreads narrow in recent months.

Investors’ expectations for inflation are rising - posing a risk to bondholders because the ECB’s asset purchasing programme targets inflation and if price pressures rise quickly, it might force the central bank to rethink its aggressive bond purchases.

A key gauge of long-term euro zone inflation expectations, the five-year, five-year breakeven forward, rose to a six-month high on Friday, having risen throughout August.

Despite the recent rise in bond yields, however, inflation-adjusted bond yields in Germany remain firmly in negative territory.

“One key feature of the markets in recent months has been that despite low and stable 10 year nominal bond yields, a dramatically divergent move has occurred beneath the surface with real yields plunging to record lows and inflation expectations surging,” wrote Societe Generale strategist Albert Edwards.

Reporting by Elizabeth Howcroft and Stefano Rebaudo; Editing by Hugh Lawson