Eurozone bond yields rise as German inflation ticks up

LONDON: German government bond yields on Thursday climbed from all-time lows as data showed German state inflation edging closer to the European Central Bank's target and mounting optimism for a resolution of the US-China trade war prompted a reversal of safe haven buying.

Germany's 10-year bond yield reached its highest level in a week at -0.27%, up over two basis points on the day, while its 30-year bond yield was up over three basis points to 0.313%, also its highest level in a week.

Most other 10-year yields in the bloc were around two basis points higher.

Though inflation edged towards the European Central Bank's target of close to, but just below 2%, analysts said the figures are unlikely to prompt a reversal of its decision not to raise interest rates in the coming year.

"One or two data points do not make a trend...there will be no change in ECB policy and even if there are some positive numbers, they aren't necessarily green shoots and the lower forever mantra is in place," said Matt Cairns, rates strategist at Rabobank.

In North Rhine-Westphalia, Germany's most populous state, inflation accelerated to 1.7% from 1.6%. In Bavaria, consumer prices rose by 1.8% after a 1.6% increase in May. The harmonised reading is due at 1200.

German bond yields tracked the move higher in US Treasuries in early trade but any major rise in yields is likely to be tempered by underlying expectations for continued monetary easing in the bloc.

European Commission data showed euro zone economic sentiment dropped to its lowest point in nearly three years in June with confidence falling markedly in Germany and Italy.

Hopes are building for the resolution of a long standing trade war between the US and China with the South China Morning Post reporting a tentative truce in their trade dispute ahead of a meeting between leaders of the two nations at the G20 summit this weekend.

Trump said on Wednesday a trade deal with Chinese President Xi Jinping was possible this weekend but he is prepared to impose US tariffs on virtually all remaining Chinese imports if the two countries continue to disagree.

Rabobank's Cairns said that the expectation of a positive outcome from the G20 meeting is "tenuous to say the least".

"Trump will continue to extract some degree of political capital in rattling the sabre against China," he said.

Primary markets are providing ample funding opportunities and strong demand for bonds meant that Austria was able to place a five year bond at a yield of -0.435%, becoming the first euro zone sovereign to price a public sale of debt below the -0.40% deposit rate.

Austria also reopened its 100-year bond to raise an additional 1.25 billion euros

Italy followed up on Thursday by selling five and 10-year bonds at their lowest yields in more than a year.