UPDATE 2-Euro zone bond yields steady below multi-month highs thanks to Lagarde

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices, adds context)

LONDON, May 24 (Reuters) – Euro zone government bond yields were broadly steady 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 was generally subdued while equity markets struggled for momentum as investors awaited key U.S. inflation readings later this week for guidance on monetary policy.

All in all, bond markets were given some breathing space from a recent sharp selloff.

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 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, taking the edge off jittery 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.

They expect bond supply volumes to moderate to about 17.5 billion euros this week.

Germany’s 10-year bond yield was little changed at -0.14% , around six basis points below recent two-year highs. It has risen about 6 bps this month.

Across the euro area, yields held below last week’s highs, but started to face some renewed upward pressure as oil prices climbed 2% .

Analysts said the direction of travel for bond yields remained higher given growing signs of a recovery from the coronavirus.

“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.

For others, any rise in borrowing costs presented a buying opportunity.

“We think Bunds at 0% are a buy, effectively,” said Ella Hoxha, senior investment manager, global bonds at Pictet Asset Management.

“The trend for us is basically intact. We can reprice the range, reprice the cyclical recovery, but we still think we’re in an environment where there’s little impetus to drive structural growth or inflation much higher.”

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