UPDATE 1-Germany’s 10-year bond set for best day in two months as growth fears catch on

Recasts, adds comments, details, chart, updates prices

By Yoruk Bahceli

May 12 (Reuters) – Euro zone bond yields fell sharply on Thursday and were set for their best daily performance since early March after U.S. inflation data reinforced investors’ concerns over the outlook for growth given the prospects for aggressive central bank rate hikes.

The U.S. consumer price data, released on Wednesday, showed inflation slowed in April but was still higher than expected, while a narrower reading stripping out volatile food and energy prices rose sharply. nL2N2X315F

That eventually pushed stock markets and bond yields sharply lower, with much of the move coming after the European close, as the focus turned back to the economic toll that aggressive Fed rate hikes could have. nL2N2X32ZQ nL2N2X32KF

On Thursday, that weak sentiment was mirrored in Europe and stocks tumbled nearly 2% while U.S. stocks were also set for more selling pressure.

Bond yields fell sharply led by the longer-end of the yield curve and Germany’s 10-year yield, the benchmark for the bloc, was down over 13 bps by 1131 GMT, the lowest in two weeks and its biggest daily fall since March 1. DE10YT=RR Bond yields move inversely with prices.

“It feels like there is a lot of positioning getting flushed out around these (inflation) releases in the U.S. But more broadly we have an environment where growth concerns are accelerating… That comes at a central banks are becoming more and more hawkish,” said Antoine Bouvet, senior rates strategist at ING.

“In this environment if central banks get inflation under control and growth is slowing down, then all of a sudden bonds that didn’t really behave like safe havens over the past few months start behaving like safe havens.”

Market-based inflation gauges are also falling sharply, with the euro zone five-year five-year breakeven forward down to 2.20% on Thursday, having risen as high as 2.50% last week. EUIL5YF5Y=R

Germany’s two-year yield, sensitive to interest rate expectations, was down 10 bps to 0.04%, the lowest in three weeks and nearing negative territory, which it exited in mid-April. DE2YT=RR

Money markets meanwhile have trimmed their bets on ECB rate hikes, now pricing in 83 bps of hikes by year-end, compared to 95 bps at the start of the week. ECBWATCH

Moves this week have marked a remarkable turnaround for bond markets, where yields recently rose above key levels as investors ramped up their bets on rate hikes from central banks to combat decades-high inflation.

Germany’s 10-year yield is down 28 bps this week, set for its biggest weekly fall since early March.

That has been supportive of Italian debt, a key beneficiary of ECB stimulus, with the closely-watched risk premium over German bonds falling to 188 bps after rising over 200 bps recently, which was the highest since May 2020.

Its 10-year yield is at 2.75%, down from over 3% last week and was down 14 bps on Thursday. IT10YT=RR, DE10IT10=RR

Italy raised 6.75 billion euros from an auction of three, seven and 30-year bonds to strong demand. nAPN0KMLUI

In another auction, Ireland raised 1.25 billion euros from 10 and 23-year bonds. nL2N2X40RF

(Reporting by Yoruk Bahceli; Editing by Simon Cameron-Moore and Angus MacSwan)

((Yoruk.Bahceli@thomsonreuters.com; +44 20 7542 7571; Reuters Messaging: yoruk.bahceli@thomsonreuters.com))