UPDATE Eurozone yields fall as bond selloff eases

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* Eurozone Periphery Government Bond Yields http://tmsnrt.rs/2ii2Bqr (adds analyst comment, background)

By Stefano Rebaudo

MILAN, Sept. 29 (Reuters) – Eurozone bond yields fell on Wednesday, following the evolution of borrowing costs in the United States, which eased overnight as low bond prices attracted traders after an auction showed solid demand.

Bond yields on both sides of the Atlantic have risen since the US Federal Reserve last week gave the latest clues about reducing its asset purchases and rising interest rates.

St. Louis Federal Reserve Chairman James Bullard gave impetus to bond liquidation on Tuesday by warning that high inflation may require more aggressive central bank action, including two rate hikes of interest in 2022.

US borrowing costs fell in London trading, the 10-year Treasury yield down 3.5 basis points to 1.5%.

The yield on German 10-year government bonds fell 2 basis points to -0.217%.

“Bunds are not immune” to a recent revision in global inflation and rate expectations in the United States, Commerzbank analysts told clients.

They noted that Bunds outperformed against other European government bonds as well as against US Treasuries and UK Gilts during the liquidation.

However, on Wednesday, Italian bonds were the best performer, with 10-year BTP yields falling 5 basis points to 0.81%.

Investors were awaiting central bank speakers on the second day of the Sintra online forum with a high-level political panel on Wednesday evening.

The recent rise in yields “is almost entirely due” to rising inflation expectations, analysts at Unicredit said.

“It’s hard to see heavy rhetorical interventions (from central bankers). It would also imply that the upward trend in yields could continue in the short term,” they said.

“The market reassessed a rate hike after recent comments from the ECB and after higher and more persistent inflation,” said Lauréline Renaud-Chatelain, bond strategist at Pictet Wealth Management.

“According to the pricing of Euribor interest rate futures, the first rate hike of 25 basis points will take place in December 2023. At the end of August, expectations for the first hike were in December 2024,” he said. she adds.

Eurozone economic sentiment edged up in September, as inflation expectations continued to rise among manufacturers and consumers, according to data from the European Commission Economic Sentiment Index.

Citi analysts saw a possible slowdown in asset purchases by the European Central Bank (ECB) this week, citing “some recent seasonality seen for the last week of the month.”

As part of its quantitative easing program, the ECB ramped up its money printing, buying 26.420 billion euros net ($ 30.86 billion) in assets last week, above 21.544 billion euros purchased a week earlier.

(Report by Stefano Rebaudo, edited by Kirsten Donovan)

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