Euro zone bond yields rise on US reflation trade

MILAN: Euro zone government bond yields rose on Tuesday, tracking US Treasuries, amid expectations of more fiscal stimulus in the United States, while the Federal Reserve reiterated it was not concerned about the rise in US borrowing costs.

But bond markets in Europe remained supported by the European Central Bank, as coronavirus restrictions kept weighing on the economic outlook, while reflation trade was in place in the United States.

ECB board member Isabel Schnabel reaffirmed the central bank's dovish stance, saying a short-term rise in inflation will not have an effect on monetary policy decisions, which are geared towards the medium term.

Atlanta Federal Reserve Bank President Raphael Bostic said on Monday he is not "super concerned" about the rise in 10-year yields, adding that it is not something the Fed needs to react to.

Germany's benchmark 10-year Bund yield was up 1 basis point at -0.486%, after hitting a two-month high on Monday.

"Concerns about a more pronounced sell-off in US Treasuries keep dominating," Commerzbank analysts said in a research note. "Bunds and European government bonds seem no longer immune to these dynamics, also as the steady ECB purchase pace is met by rising net supply."

Analysts expect the central bank to buy an amount of bonds broadly in line with the January net supply, which was estimated at around 150 billion euros.

Markets will focus on a US 10-year auction, which is expected to provide more information about investor demand.

Italy's benchmark 10-year bond yield was up 2 basis points at 0.563%. Outperforming Portuguese and Spanish yields were up 1.5 to 2 basis points.

The spread between Italian and German yields was at 104.4 basis points after hitting its lowest since 2016 at around 100 basis points last week.

An ongoing clash between Prime Minister Giuseppe Conte and Italia Viva head Matteo Renzi, which has brought Italian political uncertainty to the fore, has not affected bond prices.