Unshaken ECB easing expectations bring Bund yields back down

LONDON: German Bund yields dropped on Tuesday as this week's strong euro zone economic data failed to shake expectations the European Central Bank could ease monetary policy further next week.

The benchmark for euro zone borrowing costs rose 5 basis points on Monday after business surveys showed growth in the bloc accelerated to a four-year high and far more than expected.

It was the first rise after 10 consecutive daily falls and it was a brief one, as German 10-year yields traded 2 basis points lower at 0.52 percent early on Tuesday.

The release of Germany's Ifo business climate index at 0900 GMT could bring upward pressure on yields back. But the underlying sentiment was that with inflation stuck at zero, the ECB was more likely than not to cut its deposit rate further into negative territory and provide additional bond-buying stimulus next Thursday.

"We saw quite a correction yesterday but I wonder how much it was due to positioning rather than the actual data itself," RIA Capital Markets strategist Nick Stamenkovic said .

"Even though the euro zone economy is doing reasonably well at the moment, the ECB is concerned about the downside risk to medium-term growth and inflation stemming from the weakness in emerging markets and hence yesterday's data is unlikely to deter the ECB from taking further action."

Money market rates price in a cut of at least 10 basis points in the deposit rate to -0.30 percent in December and a further 10 basis point cut within a year.

Even with further easing priced in, the most closely watched measure of the market's long-term inflation expectations remained below the ECB's close-to-2-percent target.

The five-year, five-year breakeven forward, which shows where markets expect 2025 inflation forecasts to be in 2020, last traded at 1.72 percent, a significant pick-up from September's lows of 1.56 percent but still below levels of 1.8 percent hit earlier this month.

The Netherlands sells 1-2 billion euros of 10-year bonds on Tuesday, while Finland also plans to auction up to 1 billion euros of paper carrying a similar maturity.