Euro zone bonds' reflation sell-off stalls; focus on ECB minutes

AMSTERDAM: Euro zone bonds showed further signs of stabilisation on Thursday, with German yields edging up slightly after a hefty sell-off earlier in the week driven by expectations of rising inflation.

Expectations of economic recovery from the COVID-19 crisis and extraordinary fiscal stimulus in the United States caused a surge in global bond yields led by US Treasuries in recent sessions.

But, with stock markets weakening on Wednesday, the sell-off showed signs of a pause.

In the euro zone, after rising 11 basis points in three sessions to its highest since June 2020, Germany's 10-year Bund yield dipped 1 basis point on Wednesday. On Thursday, its yield was up less than 2 basis points to -0.35% at 1258 GMT.

Christian Lenk, rates strategist at DZ Bank, said the pause in the sell-off showed "some kind of exhaustion" with the reflation trade for the time being, although he expects the trade to hold up in the longer term.

Lenk said minutes from the Federal Reserve, in which the US central bank displayed willingness to steer past coming inflation, may have "led to some rethinking of market participants that the inflation trade has run a little too far."

The focus was on the European Central Bank's January meeting accounts, where policymakers highlighted inflation is still distant from the bank's target and a strong euro posed additional danger, while they were more sanguine about a rise in bond yields given borrowing costs remain low.

But with these factors all previously flagged, the minutes had little market impact as expected.

At its meeting in January the ECB kept its policy rate and stimulus package unchecked, but its messaging had been perceived as hawkish, causing a big sell-off in Southern European bonds.

Governing Council member Klaas Knot said afterwards that the ECB was ready to cut its deposit rate further below zero if necessary to keep its inflation target in sight.

The euro rose to its highest since 2018 above $1.23 in early January. It has eased since to around $1.208 currently, but is still up 8% since the start of 2020.

In the primary market, Spain raised 5.11 billion euros ($6.17 billion) via an auction of bonds due between 2024 and 2040, while France raised over 10 billion euros from the sale of bonds due between 2024 and 2029, and held a separate auction for inflation-linked bonds.