Euro zone bond yields near one-month highs as German inflation eyed

Euro zone bond yields held near one-month highs on Monday ahead of the release of German inflation data.

Bond yields moved marginally on both sides of the Atlantic in the aftermath of US Federal Reserve Chairman Jerome Powell's speech on Friday, which markets interpreted as suggesting a tapering of stimulus measures is unlikely until later in the year, sending US Treasury yields falling.

In the euro area, focus was on German inflation data due at 1200 GMT, ahead of a euro area reading on Tuesday.

A Reuters poll forecast the German EU harmonized national figure, which will follow a number of regional releases, will slow to 0.1% month-on-month and increase to 3.4% year-on-year in August.

Data for North Rhine-Westphalia, Germany's most populous state, already showed inflation slowed to 0.1% month-on-month but increased to 4.2% year-on-year in August.

Inflation in Spain came in at 3.3% year-on-year and 0.4% month-on-month, far above the 2.9% and 0.1% expected in a Reuters poll.

Bond markets are closely focused on inflation readings this year. Though inflation in the euro area came in above the European Central Bank's 2% target in July and upcoming readings are expected to show it increase further, it is largely seen as transitory.

"Bullish (US Treasury) dynamics after Powell should give Bunds a firm start into the week. Buoyant risk sentiment and German election polls remain supportive for spreads but should limit the downside in Bund yields, also with core (inflation) risks looming large," Rainer Guntermann, rates strategist at Commerzbank, told clients.

Polling showed German voters believe finance minister and Social Democrat leader Olaf Scholz won Sunday's election debate, as his party polls ahead of Chancellor Angela Merkel's conservatives, which is seen as potentially supportive of fiscal stimulus and euro area integration.

By 0725 GMT, Germany's 10-year yield, the benchmark for the euro area, was unchanged at -0.42%, just below last week's one-month high at -0.401%.

Italian 10-year yields were up less than a basis point, putting the closely watched gap with German 10-year yields at 106 bps.

Focus this week turns to supply as bond issuance picks up, with 29.5 billion euros ($34.8 billion) of issuance expected from the Netherlands, Italy, Germany, France and Spain - the highest since mid-July - according to Commerzbank analysts.

But 48.3 billion euros of redemptions and coupons from Germany and Italy will keep net supply negative, they added.