LONDON: Bond yields across the euro zone dipped on Tuesday, with German Bund yields giving up early gains as stock markets sold off in the wake of solid US inflation data that increased the chances of a Fed interest rate hike this year.
US consumer prices recorded their biggest rise in more than three years in April as gasoline and rents climbed, pointing to a steady inflation build-up that could give the Federal Reserve ammunition to raise rates sooner rather than later.
While signs of an inflation pick-up usually push government bonds yields higher, analysts said safe-haven bond markets were benefiting as jitters about a US rate rise weighed on stock-market sentiment. European shares dipped into negative territory, while Wall Street shares opened lower.
"It looks as if the US CPI data has weighed on risk sentiment," said Rabobank senior fixed income strategist Richard McGuire. "Markets would be more comfortable with the Fed raising rates on stronger activity data rather than firmer inflation data as that increases the risk of raising rates too soon."
Fed Fund futures suggest markets see about an 8 percent chance of a hike in June, sneaking up slightly after the inflation data. Germany's benchmark 10-year bond yield fell 1.3 basis points to 0.13 percent, reversing an earlier rise and heading back towards a one-month low hit last week at 0.10 percent. Other euro zone bond yields were 2-7 bps lower.
A key measure of long-term euro zone inflation expectations meanwhile struck a two-month peak on Tuesday as oil prices climbed to nearly $50 a barrel.
The steady rally in crude seen over the last fortnight saw US crude futures trade at a seven-month high of $48.42.
A measure of long-term euro zone consumer price growth often cited by the ECB, the five-year, five-year breakeven forward, topped 1.50 percent for the first time since March, heading back towards the central bank's near 2 percent inflation target.
Oil close to $50 a barrel is well above estimates around $35 anticipated by the ECB in its staff forecasts earlier this year.
Signals that a surge in the oil price may start to lift near-zero inflation will be welcome news for the European Central Bank, which is facing growing criticism of its ultra-easy monetary policy.
Germany's Constitutional Court confirmed on Tuesday it has received a complaint against the ECB's monetary policy.
German politicians have also complained about the ECB's low-interest rate policy in recent weeks, with Finance Minister Wolfgang Schaeuble partly blaming its policies for the rise of the right-wing Alternative for Germany party.
ECB Governing Council member Jens Weidmann said recent criticism may be the result of some measures having blurred the lines between monetary and fiscal policy.
Investors are eagerly awaiting minutes of the ECB's last policy meeting due on Thursday to see if this criticism is having any impact on the ECB's appetite for further easing.
"The stakes are certainly getting high, but they can't give the impression at this moment that they are giving up," Credit Agricole strategist Orlando Green said.
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