Euro zone bond yields fall despite a surge in inflation

AMSTERDAM: Euro zone bond yields fell on Wednesday after a sell-off a day earlier, even as data showed inflation continuing to rise in the bloc in March.

German and Italian yields rose on Tuesday to their highest in nearly two weeks, driven by a sell-off in U.S. Treasuries as U.S. vaccinations against COVID-19 picked up and expectations grew that trillions of dollars of infrastructure spending could further lift economic growth and debt issuance.

On Wednesday, Germany's 10-year yield, the benchmark for the euro zone, was down 2 basis points at -0.29%. Italian 10-year yields were down almost 3 basis points to 0.66%.

Euro zone inflation jumped in March, an initial estimate showed on Wednesday, taking another step higher in what is likely to be a temporary but sharp climb that may put price growth above the ECB's target near 2% later this year.

Inflation accelerated to 1.3% from 0.9% a month earlier, in line with expectations by a Reuters poll.

Inflation excluding food and energy prices, a less volatile measure that the ECB watches more closely, slowed to 1%.

The data did not move the bond market as it followed national readings showing German inflation at 2% on Tuesday.

"With wages weak, fiscal stimulus set to fade and growth expectations slower than in the U.S., overheating in the euro zone is really not an issue for the moment," ING senior economist Bert Colijn said.

He noted that rising inflation will likely prove temporary, due to increasing energy costs, the expiry of a German value-added tax cut and changes to the way inflation is measured.

But the European Central Bank will likely face a bigger communication challenge once European economies reopen during the summer and inflation rises further, Colijn added.

"For an ECB that has been struggling with providing clarity on the strategy regarding rising yields, this will become a hot summer."

ECB President Christine Lagarde defied investors who have been pushing up borrowing costs, saying in a Bloomberg TV interview on Wednesday that "they can test us as much as they want".

On the last day of March trading, German 10-year yields were set to end the month 2 basis points lower, outperforming U.S. Treasuries, which have risen nearly 30 bps this month. Bond yields move inversely with prices.

Germany's 10-year yield is still set for its biggest quarterly rise since the fourth quarter of 2019, up 30 bps since the start of the year after a sell-off in February. That was driven by rising Treasury yields and expectations the U.S. stimulus package would bring back inflation and growth.

In the United States, the focus is on President Joe Biden as he prepares to outline the first part of some $3 trillion to $4 trillion of infrastructure spending proposals expected over the next 10 years.

U.S. private employment data showed in March its largest increase since September.