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Euro zone bond yields rise on signs of economic recovery

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Reuters LONDON

By Abhinav Ramnarayan

LONDON (Reuters) - Euro zone government bond yields rose on Tuesday after the bloc's economy showed signs of a recovery that should reduce the need for monetary stimulus and increase appetite for risky assets, though a stable core inflation reading capped gains.

Government bonds sold off in early trades after consumer prices in France and Spain rose well above expectations in January.

Inflation data for the bloc released on Tuesday morning topped expectations at 1.8 percent. This is in range of the European Central Bank's target of near but just below 2 percent.

But given the rise was more modest for core inflation - which strips out volatile energy and unprocessed food prices - the overall euro zone number triggered only limited selling.

 

"We did see a bit of a selloff this morning after the Spanish and French inflation numbers, but the core inflation for the euro zone was in line with expectations and that's the number that (President Mario) Draghi flagged at the last (ECB) meeting," said Mizuho strategist Antoine Bouvet.

Core inflation was stable at 0.9 percent year-on-year in January, according to Eurostat data.

French inflation beat expectations at 1.6 percent year-on-year in January while Spanish inflation was 3 percent, the fastest rate in four years.

The yield on Germany's 10-year government bond, the regional benchmark, was up 2 basis points to 0.47 percent.

Most other euro zone yields rose 1-2 bps, though the lower-rated south European countries were in demand. The yield on Portugal's 10-year government bond fell 4 bps to 4.2 percent

Any further rise in yields would be tempered by political uncertainty in the United States and Europe, analysts said.

Curbs on travel to the United States ordered by President Donald Trump brought home to investors that he is serious about implementing his campaign pledges and led to a selloff in U.S. stocks on Monday.

"There is a feeling that maybe we have been too exuberant since he was elected, that he may be open to fiscal measures but on the other hand he has the potential to behave erratically," said DZ Bank strategist Christian Lenk.

Upcoming French elections have also been a concern for the market on prospects of far-right leader Marine Le Pen creating an upset similar to the Brexit vote or Trump's election, and pushing for a French exit from the euro zone.

The French economy picked up speed in the final quarter of 2016, after a lacklustre performance in the previous two, thanks to consumer and investment spending.

Greek bond yields spiked on Tuesday after a German Finance Ministry spokesman said further financial assistance for the debt-laden country depended on the successful completion of a review of its bailout programme and the participation of the International Monetary Fund.

The yield on 10-year Greek government bonds was up 41 bps at a seven-week high of 8.18 percent.

(Reporting by Abhinav Ramnarayan; Editing by Dominic Evans and John Stonestreet)

(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)

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First Published: Jan 31 2017 | 5:46 PM IST

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