Euro zone bond yields fall to 13-day low after ECB reassurance

LONDON: A lessening of inflation fears saw euro zone government bond yields edge down for the third day in a row on Tuesday, with Italy's 10-year yield down 5 basis points, as the market continued to calm down from last week's sell-off.

Last week, Germany's 10-year Bund yield rose to two-year highs, while Italian yields rose to their highest since September, as investors bet stronger economic growth could prompt the European Central Bank to slow the pace of its emergency bond purchases soon.

But yields started falling on Friday when ECB President Christine Lagarde said it was still too early for the ECB to discuss tapering the stimulus.

ECB policymaker Yannis Stournaras said on Tuesday that he did not see any reason to change the bank's bond-buying programme.

Germany's benchmark 10-year Bund yield was down 2 bps at -0.158% at 1130 GMT, its lowest in 13 days.

Italy's 10-year yield dropped below 1% for the first time since May 13, and was down 4 bps at 0.9738%.

The 10-year Dutch bond edged into negative territory for the first time since May 12.

US Treasury yields likewise were a touch lower after Federal Reserve officials made dovish comments, affirming support for keeping monetary policy unchanged.

Investors are now waiting for any policy hints from ECB chief economist Philip Lane, who is due to speak at 1400 GMT.

"The ECB tapering expectations eased off and in turn that should see spreads tighten. We think euro zone bonds will outperform those in the US and UK based on a more dovish ECB," said Peter McCallum, rates strategist at Mizuho.

"We generally think yields are going to go higher as the Summer data shows positivity in Europe, but with the ECB support in the near-term we'd probably be long for this week," he added.

ECB rate-setters will review the pace of emergency bond purchases at their June 10 meeting against an improved economic backdrop. Growth and inoculation rates are rising in the bloc as COVID-19 cases fall.

The German economy shrank more than expected in the first quarter as coronavirus-related restrictions spurred householders to put more money than ever into savings, data showed on Tuesday.

Germany's Ifo survey showed that German business morale improved more than expected in May - but the data did not affect bonds.

ING strategists wrote in a note to clients that euro zone bond markets are more able to withstand good economic news because of technical factors such as light supply and it being near the end of the month.