Eurozone bond yields edge up as firm US data weighs

[LONDON] Borrowing costs across the eurozone nudged higher on Tuesday as strong US data reinforced expectations of another interest rate rise this year by the Federal Reserve.

Southern European bonds continued to underperform given political tensions in Spain after Sunday's independence vote in Catalonia was marred by police violence.

Markets were calmer after sharp selloff on Monday, but the US rates outlook kept the overall mood bearish.

The US Institute for Supply Management index, released on Monday, rose to 60.8 in September, from 58.8 in August, exceeding analyst expectations. The components of the index showed gains across the board.

US construction spending rebounded in August after two straight months of declines, boosted by increases in both private and public outlays.

The data helped boost the dollar, pushing the euro to a 1-1/2-month low of US$1.1694.

A weakening in the single currency is seen as a headwind for bond markets since it could encourage the European Central Bank (ECB) to press ahead with plans to unwind its massive stimulus scheme.

The euro, up around 12 per cent against the US dollar this year, has complicated the ECB's plans for exiting the 2.3 trillion euro (S$3.7 trillion) asset purchase programme because a strong currency puts downward pressure on inflation.

Most bond yields were one to two basis points higher in early Tuesday trade. Germany's benchmark 10-year yield was up one basis point (bps) at 0.46 per cent.

Spain's 10-year yield was up almost two bps at 1.70 per cent , keeping the gap over German peers close to its widest in around four months.

REUTERS