* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates to reflect late-day move in yields, adds comment)
AMSTERDAM, Sept 1 (Reuters) - Euro zone government bond yields nudged down on Tuesday as data showing that inflation in the bloc plunged last month shifted the focus to next week’s European Central Bank meeting.
Inflation in the single currency bloc turned negative in August for the first time since May 2016 at minus 0.2%.
Underlying inflation, closely watched by the ECB, also tumbled, suggesting the bloc’s deepest recession is not temporary but could prove to be a longer-lasting drag.
There was little immediate reaction in the markets, with some pointing to ECB board member Isabel Schnabel’s Reuters interview on Monday, where she said the bank had no reason for now to add to its stimulus measures.
But borrowing costs drifted lower as the session wore on, with Germany’s 10-year bond yield last down 2 basis points at -0.41%, off recent highs that marked the highest levels since June.
Italy’s 10-year bond yield was last down 5 bps on the day at 1.10%, down from six-week highs at around 1.16%.
The fall in euro area bond yields contrasted with rising U.S. Treasury yields following upbeat U.S. manufacturing activity data.
“Today’s inflation data will probably further increase pressure on the Governing Council to adopt a very dovish stance next week and let the door open to an increase of the PEPP (Pandemic Emergency Purchase Programme) envelop if needed,” said Christopher Dembik, head of macro analysis at Saxo Bank.
European inflation readings have been in the spotlight this week after the U.S. Federal Reserve announced last week that it would start to target an average of 2% inflation over a period of time rather than using the figure as a hard annual target.
That has steepened yield curves on both sides of the Atlantic, although many analysts think that effect is probably temporary, given uncertainty around whether inflation will actually rise.
“Ultimately, how this (inflation) reading today will impact markets will depend on whether it triggers an ECB reaction, and I think that is very unlikely at this stage,” said Piet Haines Christiansen, chief strategist at Danske Bank.
There was some optimism from Germany, where the economy minister confirmed that the government increased its 2020 economic forecast to a decline of 5.8% from a previous 6.3% contraction.
In the primary market, Germany sold 327 million euros of inflation-linked bonds in an auction.
There was also focus on Sweden’s green bond, expected to price later on Tuesday, before Germany’s sale of its first-ever green bond.
Germany hired a syndicate of banks on Tuesday to sell its first ever green bond, according to a finance agency spokeswoman. (Reporting by Yoruk Bahceli, Additional reporting by Dhara Ranasinghe; editing by Larry King and Ken Ferris)
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