LONDON: German bond yields fell on Wednesday as core government debt was buoyed by investors betting that continued low U.S. inflation might deter the Federal Reserve from hiking rates until later this year.
There was little market reaction to a closely watched survey on German business sentiment that provided further signs the euro zone's largest economy could be gaining momentum.
German 10-year yields, the benchmark for euro zone borrowing costs, were down 2 basis points at 0.22 percent. Yields on other top-rated bonds were 1-2 bps lower, as positive sentiment from the U.S. bond market spilled into Europe.
U.S. 10-year yields were back below 1.90 percent
as low inflation expectations persisted even after data on Tuesday showed consumer prices increased last month, ending three straight months of declines.
This has narrowed their yield premium over Bunds to 165 basis points from a historic peak of 189 bps hit two weeks ago when the European Central Bank kicked off its trillion euro quantitative easing programme. The Fed was then expected to start tightening its monetary policy from mid-year.
Treasuries have gained since last week after the Fed cut its inflation outlook and growth forecast. Although euro zone market measures of inflation expectations have picked up on the back of the ECB's QE programme, they still remain well under the central bank's target of just below 2 percent.
"For sure inflation will remain relatively low in Europe and in the U.S. as well...The rally in the U.S. is rather at the long end of the curve. This offers some support to the long end of government bonds in Europe as well," said Patrick Jacq, a BNP Paribas strategist.
CONSOLIDATION
Jacq said euro zone markets were also consolidating hefty gains from the past few weeks as investors in the run-up to the start of the ECB's asset purchase programme on March 9.
Yields on Spanish and Italian 10-year bonds were a touch higher at 1.34 percent and 1.31 percent , respectively, as the market braced for more debt supply from Italy on Thursday. Spain sold a new 15-year inflation-linked bond on Tuesday.
After Easter, the first quarter ends and central bank purchases pick up pace, bonds issued by the euro zone's weaker economies are expected to resume the rally which took borrowing costs to fresh record lows.
Focus also remains on Greece, which has promised to deliver reform plans to its euro zone creditors by Monday to unlock funds it urgently needs to avert bankruptcy.
Optimism that Athens can secure the money before state coffers run dry has provided some relief for its debt and stock markets. Greek yields were slightly lower.
The ECB has told its banks not to increase their holdings of Greek debt, including Treasury bills.
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