Euro zone yields hold near recent highs as investors brace for inflation data

LONDON, Aug 30 (Reuters) – Euro zone government bond yields were little changed on Tuesday as traders awaited the latest policy signals and this week’s inflation data, following a start to the week in which yields soared after a round of policymaker warnings about inflation.

Bond yields jumped on Monday when money markets ramped up their bets to a two-thirds chance of the European Central Bank (ECB) delivering a 75 basis point hike next month.

Particularly in focus were comments made by ECB board member Isabel Schnabel at the weekend. She warned of rising risks that long-term inflation expectations could “de-anchor” from the bank’s 2% target and said surveys suggested that inflation was denting public trust in central banks.

Other officials said front-loading hikes would be reasonable and that the neutral rate, estimated around 1.5%, should be reached before year-end or first quarter 2023.

German bond yields rose as much as between 15 and 20 basis points on Monday to multi-month highs.

Euro zone flash inflation numbers for August are due on Wednesday, with some country-specific numbers out on Tuesday from Germany and Spain.

Economists expect the August reading for the region to rise to another record-breaking 9% from 8.9% in July.

“Investor focus will be on inflation data from Germany and Spain. Higher-than-expected figures would probably put further pressure on EGBs (eurozone government bonds),” UniCredit analysts said.

Mizuho analysts noted the consensus for Tuesday’s inflation numbers was for a month-on-month rise in Spain but a fall in Germany. “Either way, rising European power prices suggest that peak inflation is still some way off,” they added, suggesting clients sell any strength seen in euro zone bonds.

On Tuesday, Germany’s 10-year yield traded at 1.496%, unchanged on the day but close to the two-month high reached on Monday of 1.548%.

The two-year bond yield, sensitive to interest rate expectations, stood at 1.098%, also little moved on the day but near Monday’s high.

Other bond yields were slightly lower on Tuesday, with French and Spanish yields falling between 1 and 3 basis points and Italian yields unchanged.

Tuesday also sees economic sentiment data for the euro area in August, while a final reading for the same month for consumer confidence is due at the same time.

(Reporting by Tommy Reggiori Wilkes
Editing by Gareth Jones)