Euro zone bond markets calm as inflation surges past ECB target

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LONDON — Euro zone government bond markets were broadly steady on Tuesday, looking past a surge in inflation in the currency bloc to the likelihood that hefty monetary stimulus will remain in place for some time.

Source: Financial Post

Data showed inflation in the 19 countries sharing the euro accelerated to 2% in May from 1.6% in April, the first time since 2018, driven by higher energy costs and above the ECB’s aim of “below but close to 2%.”

In addition, IHS Markit’s final Manufacturing Purchasing Managers’ Index (PMI) rose to 63.1 in May from April’s 62.9, above an initial 62.8 “flash” estimate and the highest reading since the survey began in June 1997.

The ECB has stressed that a near-term rise in inflation is driven by one-off factors and long-term price pressures remain subdued, meaning stimulus will still be needed.

That may help explain the muted reaction to the data in bond markets, where yields have fallen back in the past week amid dovish comments from a slew of ECB officials. The ECB next meets on June 10.

Germany’s benchmark 10-year Bund yield was steady at -0.18% , but holding below last month’s two-year highs. Most other 10-year euro zone bond yields were little changed on the day.

Italy’s 10-year bond yield extended recent falls to 0.92% , its lowest level in around three weeks.

Economic recovery prospects in the euro zone remain uncertain and the ECB will counter any strong rises in interest rates that are not justified by economic conditions, governing council member Ignazio Visco said on Monday.