UPDATE 1-Euro zone yields, inflation expectations fall as energy prices ease

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(iterates, adds details, updates prices)

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Oct 7 (Businesshala) – Euro zone bond yields fell on Thursday as energy prices continued to slide, recovering from a sharp sell-off a day earlier that was driven by inflation concerns.

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As gas and oil prices rose on Wednesday, bonds sold and yields, which move inversely with prices, rose sharply, as already high inflation prior to the price hike pushed market-based inflation sharply higher. Had done it.

But gas and oil prices fell later, helped by comments from Russian President Vladimir Putin, and an unexpected rise in US crude inventories and continued declines on Thursday dampened bond yields and inflation expectations in the euro area.

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Democrats in the US Senate said they could accept a Republican proposal to ease the partisan deadlock, which has threatened US loan defaults later in October, has also helped.

As of 1105 GMT, Germany’s 10-year yield, the benchmark for the euro zone, hit -0.147% on Wednesday, down nearly 2 basis points from the highest since the end of June at -0.20%.

Underperforming Italian bonds on Wednesday were an outperformer with a 10-year yield up 4 bps to 0.85% on Thursday, widening the yield gap with German peers to nearly 104 bps from Wednesday’s one-week high of 108 bps.

A key market gauge of euro inflation expectations tracked by the ECB fell to 1.7695%, the lowest in a week and some 10 bps below the seven-year high they touched on Wednesday.

Falling energy prices have helped stabilize bond markets, but, “eventually, through all that noise, we think rates are going up,” said Antoine Bouvet, senior rate strategist at ING.

Bouvet emphasized the risks arising from hawkish turns not only from the US Federal Reserve and the Bank of England, but also from the ECB, where some policymakers have expressed concern that higher inflation could be less temporary than expected.

The ECB will issue its September meeting accounts at 0930 GMT.

They follow a Businesshala News report citing sources that the bank is studying a new bond-buying program to prevent market volatility when its pandemic emergency bond purchase program (PEPP) ends next year. Happening.

The potential new program would replace the traditional bond purchases of PEPP as well as the ECB and it would bypass rules that govern how much debt the ECB will buy from each country, the report said. that no decision has been made.

“It is not by chance that this now comes up ahead of a very important December (policy) meeting,” said Bouvet of ING.

There was little market reaction to the report, but Bouvet said the parameters of a potential new program would be important, as the optionality could also mean the ECB buys fewer bonds overall, if it follows the PEPP the size of its traditional purchases. enhances. ends.

Investors are also eyeing the bank’s speakers, including chief economist Philip Lane and board member Isabel Schnabel, while other speakers stressed they think inflation and rising energy prices will be fleeting.

In the primary market, Spain and France raised medium- and long-term bonds at auction. (Reporting by Yoruk Bahcelli; Editing by Alison Williams and Toby Chopra)

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