Eurozone yields rise as inflation defies currency strength

[LONDON] Eurozone government bond yields edged up on Wednesday as forecast-beating inflation in Spain was expected to be followed by similar data in Germany, defying the euro's recent strength.

Analysts said attention switched to the bloc's economic health as the initial shock about North Korea's firing a missile over Japan abated.

Gains of nearly 14 per cent for the euro against the US dollar this year should have held down prices in the bloc as imports become cheaper.

But data on Wednesday showed Spanish inflation rose two per cent year-on-year in August, beating economists' forecasts of 1.8 per cent and last month's reading of 1.7 per cent.

Economists expect data at 1200 GMT to show consumer prices in the bloc's biggest economy Germany to rise 1.8 per cent year-on-year in August, up from 1.7 per cent in July.

"We are very much in a situation where, with the euro rising, investors are expecting inflation pressures to soften in the coming months," Mizuho strategist Antoine Bouvet said.

"So higher inflation data goes counter to the markets'expectations and you would expect more of a reaction as it would be more of a worry to investors."

Data on Thursday is expected to show eurozone inflation at 1.4 per cent, up from 1.3 per cent previously.

That is still well below the European Central Bank's near two percent target, but the upward trend comforts policymakers who are considering whether to rein in their stimulus.

On top of that, eurozone economic sentiment is forecast to hit a new 10-year high on Wednesday, rising for a fourth consecutive month in August.

German 10-year bond yields, the bloc's benchmark, rose two basis points on Wednesday to 0.36 per cent, climbing off a two-month low of 0.34 per cent hit Tuesday.

Most other eurozone yields were one to two bps higher on the day, reversing some of Tuesday's slide. Yields rise as prices fall.

Analysts said a measured response from the United States to North Korea's ballistic missile test early on Tuesday had also helped ease a rush into bonds, which are seen by investors as a safer store of cash than equities in times of crisis.

The United Nations, in a statement drafted by the United States, condemned the missile test but held back from any threat of new sanctions against Pyongyang.

Debt sales by Finland and Italy and an exchange from Portugal were also seen adding upward pressure to yields on Wednesday as investors sold their outstanding bonds to make room for the new supply.

REUTERS