Euro zone bond yields head back up after two days of falls

LONDON, April 27 (Reuters) – Euro zone government bond yields rose on Wednesday, heading back towards multi-year highs after two days of falls as attention returned to high inflation and tighter monetary policy.

Surprisingly strong inflation data from Australia, showing consumer prices surged at the fastest annual pace in two decades in the last quarter boosted expectations for a rate rise there.

News that China’s central bank will step up policy support for the economy, especially small firms hit by COVID-19, eased worries about risks to the global growth outlook that have pushed euro zone bond yields down this week.

In early trade, Germany’s benchmark 10-year Bund yield was up around 4 basis points on the day at 0.85%, having hit roughly two-week lows on Tuesday.

Across the single currency bloc, sovereign borrowing costs rose, heading back towards recent multi-year highs.

“Australian inflation is definitely (one reason)…, so is hope of Chinese stimulus to help support the economy,” said ING senior rates strategist Antoine Bouvet, explaining the move in yields.

A rise in oil prices as Russian gas supplies to Poland were halted on Wednesday and a weakening euro, which fell to a five-year low EUR=EBS, also returned the market’s attention to high inflation.

Expectations that the European Central Bank will hike interest rates sooner rather than later to contain inflation has helped drive bond yields this year. But this week has seen a bit of a market rethink as concerns about the growth outlook resurfaced.

German consumer morale is projected to plunge to a historic low in May as the war in Ukraine leads to soaring costs for households, a survey showed on Wednesday.

Analysts said that after a slew of hawkish comments from ECB officials, any dovish commentary could now move markets. ECB President Christine Lagarde and chief economist Philip Lane speak later on.

“We’ve argued that with the barrage of hawkish comments of late, only doves have the power to move the market’s rate expectations,” said Bouvet.

“President Lagarde in particular has adopted a more moderate tone than other Governing Council members. Any departure from the ‘gradualism’ rhetoric could be impactful.”

Greece started the process of selling seven-year bonds after announcing on Tuesday that it had hired banks for the transaction.

Germany is scheduled to sell new 15-year Bunds, which Commerzbank’s head of rates Christoph Rieger said would be an interesting test for investor demand at yields close to 1%.

German 15-year bond yields were last trading at 0.90%, having flirted with 1% over the past week.

(Reporting by Dhara Ranasinghe; editing by John Stonestreet)