Euro zone bond yields fall as investors focus on growth risks

June 30 (Reuters) – Euro zone bond yields fell as financial markets continued to focus on growth risks on Thursday.

The fastest rate-hiking cycle in decades to combat soaring inflation has hit consumer demand, elevating investor fears of a growth slowdown or outright recession.

Data from France showed annual June inflation came in slightly higher than expected at a record 6.5% ahead of a euro zone-wide print on Friday, the last the ECB will scrutinize ahead of its July 21 policy meeting, where it is expected to hike rates by 0.25%. Monthly figures were in line with a Reuters poll’s expectations.

Thursday’s moves follow volatile trading on Wednesday, when bond yields tumbled after German inflation unexpectedly fell in June, though economists warned this was driven by one-off effects and was unlikely to be a sign that inflation has peaked.

They ended the session sharply lower, even after Spanish data showed inflation rising much higher than expected to more than 10%, but ended the session sharply lower.

On Thursday, 0739 GMT, Germany’s 10-year yield, the benchmark for the bloc, was down nearly 7 basis points (bps) to 1.44%, adding to a 13 bps fall on Wednesday.

Italy’s 10-year yield was down 6 bps to 3.45%, with the closely-watched spread to German peers at 199 bps.

“It’s probably a combination of things. A little bit of a relief rally that French inflation wasn’t higher, but also risk assets are really starting to deteriorate now. It’s a pessimistic drop on risk assets that’s probably leading to some short covering or a bit of buying in rates,” said Peter McCallum, rates strategist at Mizuho.

Stock markets also dropped sharply on Thursday.

“Markets are feeling more confident that central banks are going to be on top of inflation, so you’ve had breakevens falling fairly sharply, but to get to that inflation falling situation, central banks will probably have to stay the course with their tightening,” McCallum added.

For example, the US 5-year breakeven rate, a market gauge of inflation expectations, fell to its lowest since October 2021 on Wednesday, at 2.66%.

In another sign of those growth fears, the iTraxx Europe crossover index, which measures the cost of insuring exposure to sub-investment grade European corporate high yield bonds, rose above 600 basis points for the first time since April 2020, the height of the COVID-19 pandemic.

Later in the session investors will also eye the US Federal Reserve’s favoured inflation gauge, the core personal consumption expenditures index, which a Reuters poll expects to rise slightly on a monthly basis, but drop slightly year-on-year.

In the primary market, Italy will raise up to 7 billion euros from a new 5-year bond, and re-openings of a 10-year and seven-year floating-rate bond.

(Reporting by Yoruk Bahceli; Editing by Alex Richardson)