Germany's 10-year bond yields fall to one-week low, Italy in focus

MILAN: Euro zone core bond yields fell on Thursday, with Germany's 10-year bond yield down to a one-week low, as global markets focused on a dovish Federal Reserve outlook after an unexpectedly soft reading on US inflation.

Furthermore, the European Commission said the euro zone economy would rebound less than earlier expected from the coronavirus slump this year, adding that 2022 growth would be stronger than earlier thought.

Germany's 10-year government bond yield was down 2.5 basis points at -0.463% after hitting a one-week low at -0.474%.

The benchmark 10-year US Treasury yield fell to 1.14%, well off Monday's 1.2% peak, as US inflation data on Wednesday missed expectations.

Late on Wednesday, Federal Reserve Chairman Jerome Powell said he wanted to see inflation reach 2% or more before even thinking of tapering the bank's super-easy policies.

"A tame US CPI print in January means markets don't have to worry about a hawkish Fed for now. A look at a broader set of indicators than just interest rates shows the reflation trade is alive and kicking. Risk appetite should continue to improve, pushed by ever lower real rates," ING said in a note to clients.

According to Saxo Bank fixed income strategist Althea Spinozzi, markets believe that lockdown measures and economic slowdown will be prolonged and that central banks will continue to be dovish.

"Today Germany's bonds yield fall was a rebound after recent sell-off," she added.

Italian bond yields remained around recent lows after borrowing costs fell to new record lows at an auction on Thursday as Mario Draghi was expected to present his new government coalition in the next few days.

Italy's anti-establishment 5-Star Movement began voting on Thursday on whether to support a cabinet led by Draghi, in what could be one of the final steps before a new government is formed.

Italy's 10-year BTP, or government bond, yield was almost two basis points down at 0.488%, hovering around its lowest level since early January.

The Italian/German 10-year yield spread was trading at 94 basis points, close to its lowest level in more than 5 years .

"We are unlikely to witness a further fall of the Italian bond yields over the next few weeks. But if Draghi gets the EU leaders' support for his coalition government and its projects, we could see a further fall," said MFS fixed-income research analyst Annalisa Piazza.

Focus turns to a reading on Americans filing applications for weekly unemployment benefits later in the day.