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Eurozone yields stabilise as global inflation slowdown fears ease

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Economic conditions are stabilising in China and the outlook is for steady growth in the eurozone, while the US and UK economies are losing steam, the Organisation for Economic Co-operation and Development said on Monday.

[LONDON] Eurozone bond yields settled on Wednesday after a sharp rise the previous day caused by a surprise uptick in UK inflation, with investors wary that a similar reading in the United States later could make a Federal Reserve rate hike imminent.

Tuesday's UK data, showing core inflation hitting a five-month high, eased some concerns that a wavering Chinese economy would fuel a significant slowdown in inflation on a global scale.

Such worries have pushed yields sharply lower in recent weeks as parts of the market expected the Fed and the Bank of England to put aside any plans for a near-term rate hike. Some analysts and investors even made the case that the European Central Bank might be forced to extend its 1 trillion euro bond buying programme beyond its scheduled end in September 2016.

But eurozone yields held at higher levels on Wednesday even though Chinese stock markets extended their recent plunge.

US inflation data is due at 1230 GMT and minutes from the Fed's last meeting will be released later. Both will be scoured for clues on whether the Fed will raise interest rates next month for the first time in nearly a decade.

German 10-year Bund yields held steady at 0.64 per cent. Yields on lower-rated euro zone bonds in Spain , Italy and Portugal were 1 basis point higher, having risen 4-9 bps the previous day. They traded at 2.00 per cent, 1.81 per cent and 2.48 per cent, respectively.

Bund futures were 6 ticks lower at 154.76. "The upside surprise in UK inflation put pressure on the Bund future while weaker Asian stock markets provide support,"said Benjamin Schroeder, rate strategist at Commerzbank. "The US CPI release might lead to some stabilisation, but even then the focus might remain more on the near-term developments where commodities continue trading subdued, and an early Fed hike might be feared to turn out as a policy error which could choke off the underlying price momentum." Fitch upgraded its credit rating for Greece on Tuesday, saying the bailout deal the country struck with foreign lenders reduced the chance of default. The rating is now CCC, up from CC.

German lawmakers are expected to vote overwhelmingly in favour of Greece's third bailout on Wednesday, even though Chancellor Angela Merkel faces a rebellion in her own party ranks.

Greek 10-year yields were 7 basis points higher at 9.35 per cent, having fallen from almost 20 per cent in the past five weeks.

On the supply side, Germany sells two-year bonds at an auction later on Wednesday.

REUTERS