Euro zone bond yields edge higher, eyes on the ECB

MILAN: Euro zone government bond yields steadied on Wednesday as recent comments by European Central Bank (ECB) officials failed to soothe fears of a potential monetary tightening while US yields continued rising.

Market expectations for future interest rates do not square with the European Central Bank's guidance for no hike until inflation is seen stably at 2%, the ECB's chief economist Philip Lane said on Tuesday.

US borrowing costs rose in early London trade, with the 10-year yield up 1.5 basis points, after hitting a fresh 5-month high at 1.637% overnight.

"It appears that market participants are getting cold feet as the ECB determination to look through current inflation pressures appears half-hearted," Commerzbank analysts told clients. "Even super-dove Rehn was quoted saying that inflation is now in line with the ECB strategy."

The surge in inflation in the eurozone is still mostly temporary, but households and firms will start to lift their price expectations if it lasts much longer, European Central Bank policymaker Olli Rehn said on Tuesday.

Germany's 10-year government bond yield, the benchmark of the bloc, rose 0.5 basis point to -0.11%.

Lane's comments were regarded as more reassuring, but "he said similar things before, and without more explicit broader support from his colleagues," Commerzbank analysts added.

The German break-even rate - a gauge of inflation based on the difference in yield between the inflation-protected and nominal debt of the same maturity - is close to the highest since April 2013 at 1.77%.

"We see no hike before late 2023. Instead, markets should be concerned about the impact of QE (quantitative easing) tapering, in particular on long yields and spreads," ING analysts said, adding that the rise in euro interest rates "has more to do with similar moves in the US and UK."

They also flag as possible implications of a tapering "a bear-steepening of the yield", and spreads, for instance between Italian and German bonds, coming under widening pressure.

Italy's 10-year government bond yield was flat at 0.933%, after hitting a fresh high since May at 0.96%.