UPDATE 4-Inflation, Holzmann push German yields to five-week high

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Aug 31 (Reuters) - Benchmark German bond yields rose to the highest in over five weeks on Tuesday after a higher-than-expected inflation reading and an ECB policymaker called on the bank to reduce its emergency bond purchases as soon as the next quarter.

Robert Holzmann, governor of Austria’s central bank, said the bank was in a situation where it could think about reducing buying and added he expected the issue to be discussed at the bank’s policy meeting next week.

Bank of France governor Francois Villeroy de Galhau had also struck a more hawkish tone on Monday when he said the ECB should take into account the recent improvement in financing conditions when discussing the future of the pandemic purchases.

Holzmann’s call to start tapering bond purchases followed data showing euro zone inflation increased to 3% year-on-year in August, the highest in a decade, far above the European Central Bank’s 2% target and a 2.7% forecast by a Reuters poll.

Core inflation, a narrower reading that strips out volatile food and energy costs, also rose to 1.6%, compared to expectations for a 1.4% rise.

Germany’s 10-year yield, the benchmark for the euro area, rose 5 basis points to a high of -0.383%, the highest since Jul 22.

Italian 10-year yields rose to a high of 0.7050%, up 8 basis points, pushing the closely watched gap with German 10-year yields to 109 bps.

“Holzmann definitely accelerated the move higher in yields but it started earlier in the day and continued afterwards. Inflation was a factor, although I would argue that the immediate policy implications are limited,” Antoine Bouvet, senior rates strategist at ING, said.


Though bond markets have closely focused on inflation readings this year, initial price action following the data was limited.

Inflation came in above the ECB’s target for a second consecutive month and was expected to rise further over the remainder of this year.

However, the increase is considered to be temporary as it is driven by transitory factors and policymakers say it will languish well below the bank’s target for years to come.

Ludovic Colin, portfolio manager at Vontobel Asset Management, said the European Central Bank’s new symmetric 2% inflation target, which allows for temporary overshoots, was keeping markets calm regarding rising inflation.

Elsewhere, following the summer lull, issuance will see the busiest week since mid-July, Commerzbank said.

On Tuesday, Italy raised 7.75 billion euros ($9.17 billion)from the re-opening of five and 10-year bonds, alongside a seven-year floating-rate bond, with the five-year issued at a record low yield of -0.01%.

The Netherlands raised 2 billion euros from the re-opening of a four-year bond.

Further supply is expected as soon as Wednesday, with Greece hiring a syndicate of banks to re-open a five and a 30-year bond, and Germany hiring banks to sell a new 30-year bond on Tuesday.

“I think supply pressure also shoulders some of the blame (for the sell-off),” ING’s Bouvet said.

($1 = 0.8450 euros)

Reporting by Yoruk Bahceli; Additional reporting by Julien Ponthus; Editing by Angus MacSwan, Dhara Ranasinghe, Barbara Lewis and Gareth Jones