Euro zone bonds calm down as markets focus on Powell

AMSTERDAM: Euro zone bond yields dipped on Thursday after a global bond sell-off a day earlier that spooked markets, as market attention turned to a speech from Federal Reserve Chairman Jerome Powell due later in the day.

Bets that US stimulus would boost inflation and growth pushed government bonds worldwide to their worst performance in years in February. Central banks so far have appeared relatively sanguine about the rise in bond yields.

Yields are down from their highs this week, but pressure remains. US Treasury yields rose on Wednesday, alongside euro area government bond yields and UK gilts, pushing stock markets and other low-yielding safe assets lower on Thursday.

On Thursday, Germany's 10-year yield was down around 3 basis points at -317% at 1610 GMT, after rising 5 basis points on Wednesday.

Italian bond yields were little changed, pushing up the gap between 10-year Italian and German yields to around 105 bps.

Focus on Thursday is on a speech by the Fed's Powell, who investors will watch for any hints of concern about the recent jump in bond yields.

Mikael Olai Milhoj, senior analyst at Danske Bank, noted that inflation expectations moved higher together with inflation-adjusted "real" bond yields on Wednesday, a move he said would be more acceptable from the Fed's perspective.

Such a move implies that the rise in yields is driven by expectations of a pick-up in inflation, a positive signal for economic recovery from the pandemic, rather than an unwarranted tightening in financial conditions.

"We will still listen closely for any possible verbal intervention from the Fed if they start to think (in particular real) rates have moved too high," Milhoj told clients.

In Europe, the ECB has been under scrutiny after last week's bond-buying data did not show a pick-up in net or gross purchases, and some policymakers played down concerns around rising bond yields.

The recent rise in euro zone borrowing costs may reflect improved growth and inflation prospects, ECB policymaker Klaas Knot, considered a hawk, said on Thursday.

On the data front, euro zone retail sales fell far more than expected in January, but this had little impact on the market with such back-dated data typically moving markets less.

In the primary market, focus was on longer-dated supply from France, which auctioned nearly 11 billion euros of bonds due between 2030 and 2052, while Spain raised 6.18 billion euros from bonds due between 2026 and 2035.