Inflation prospects and oil surge push up eurozone bond yields

Eurozone government bond yields rose on Tuesday as investors returning from holidays across the globe were welcomed by sharply rising oil prices and data showing that German inflation hit its highest level in more than three years in December.
German consumer prices, harmonised to compare with other European countries (HICP), were up by 1.7 percent on the year after an annual increase of 0.7 percent in November. Earlier, December inflation in the bloc's second biggest economy, France, hit its highest rate since May 2014. The likely underlying driver is a rebound in energy prices, but inflation is also expected to be bolstered in 2017 by the fiscal policies of US President-elect Donald Trump and signs of faster growth in China.
Oil prices hit 18-month highs on Tuesday, bolstered by hopes of a deal between producers to cut output. "The main driver is the weaker currency (against the dollar) and a rise in commodities prices - that in itself is not a positive," said Mizuho strategist Peter Chatwell. "But if it feeds through into wages, then it could lead to an increase in the economic output of the stronger euro zone countries, and yields could rise further from March onwards."
Long-term inflation expectations in the euro zone, measured by the five-year, five-year forward rate, rose to their highest level since December 2015 and close to the ECB's target of near 2 percent. "Until just a few weeks ago, the general consensus was that upside inflation risks were very limited," said DZ Bank strategist Birgit Figge. Overall eurozone numbers will be published on Wednesday, with economists expecting prices to have grown 1 percent year-on-year, up from 0.6 percent previously. German 10-year bond yields, the euro zone benchmark, rose 10 basis points to a two-week high of 0.29 percent having hit a two-month low of 0.16 percent on Monday. Most other euro zone equivalents were up 8-13 basis points, with France and Ireland's at well over two-week highs.
Portugal's 10-year benchmark bond yield rose as much as 23 bps to a high of 3.95 percent, the highest since December 12, when it hit a six-month high. A private business survey indicated that China's factory activity had picked up more than expected in December as demand accelerated, with output reaching a near-six-year high.