Euro zone bond yields hold below multi-month highs thanks to Lagarde

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

LONDON, May 24 (Reuters) – Euro zone government bond yields were a touch lower on Monday, as dovish comments at the end of last week from European Central Bank chief Christine Lagarde kept borrowing costs below recent multi-month highs.

A dearth of economic data and a holiday in parts of Europe meant trade in bond markets was generally subdued. This, alongside a weaker supply outlook for the week, meant bond markets should get some breathing space from a recent sharp selloff.

Germany’s 10-year Bund yield rose to two-year highs, while Italian yields rose to their highest since September last week as investors bet stronger economic growth could tempt the ECB to slow the pace of its emergency bond buys soon.

But Lagarde said on Friday it was still too early for the ECB to discuss winding down its 1.85 trillion euro emergency bond purchase scheme, bringing calm to bond markets.

“Soothing comments from Lagarde and the improving flow profile suggest that the recovery in Bunds has chances to continue,” Commerzbank analysts said in a note.

Commerzbank expects bond supply volumes to moderate to about 17.5 billion euros this week.

Germany’s benchmark 10-year bond yield was a touch lower at -0.13%, around six basis points below two-year highs hit last week. Across the euro area, yields pulled back from last week’s highs.

Still, analysts said the direction of travel for bond yields remained higher given growing signs of a recovery from the coronavirus pandemic.

“We think there is still potential for rates to rise, we think the Bund yield will turn positive and look for it to reach 10 basis points by the end of the year,” said Jorge Garayo, a senior rates strategist at Société Generale.

Garayo said that the COVID vaccine rollout and a brighter economic outlook would likely lead the ECB to slow its emergency bond buying later this year although talk of tapering was premature for now.

The ECB holds its next meeting on June 10.

A mixed performance on world share markets and concern about geopolitical tensions after Belarus forced an airliner to land and detained an opponent, sparking condemnation from Europe and the United States, may also have supported safe-haven bonds.

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