Make Kitco Your Homepage

Euro zone yields stay near lows as ECB keeps taps flowing

Kitco News

* German 10-year yields hover near six-week lows

* Italy-Germany spread near tightest level in a month

* Euro zone periphery govt bond yields (Rewrites to reflect ECB statement)

LONDON, June 10 (Reuters) - Euro zone government bond yields were trading near their lowest levels since April on Thursday as the European Central Bank kept its emergency bond purchases running at a brisk pace.

Speculation has mounted this year that an expected global economic recovery could lead central banks worldwide to dial back on their extraordinary monetary easing.

But the ECB maintained an elevated flow of stimulus as expected on Thursday, fearing that any retreat now would accelerate an already worrisome rise in borrowing costs and choke off a fledgling recovery.

"The ECB is keeping the taps on and giving the economy the best opportunity to go into growth mode," said Mizuho's head of rates Peter Chatwell.

This in turn should boost underlying inflation dynamics, and a key market gauge of long-term inflation expectations - the five-year, five-year forward inflation-linked swap - should increase as a result, he added.

That gauge was slightly higher on Thursday at 1.5703%, compared to 1.5639% the day before.

Germany's 10-year bond yield, the benchmark for the bloc, was a little higher on the day at -0.23%, but still within touching distance of a six-week low of -0.268% hit on Wednesday.

Euro bond yields ranging from high-grade Netherlands to comparatively low-rated Italy were all trading 1-2 basis points higher but still near their lowest levels since April. The ECB statement did not move prices.,

The closely-watched Italy-Germany 10-year bond yield spread held at 107 basis points. This gap, seen as a sentiment indicator in the single currency bloc, was as its tightest level in over a month on Wednesday at 104.98 bps.

The overall direction of travel, however, is upwards. Germany's 10-year yield was at -0.61% at the start of the year, for example.

"Whilst the ECB may not decide to taper purchases for the coming quarter, the direction of travel over the medium term is set to turn less dovish as the growth outlook continues to improve as the vaccine rollout within the region picks up pace," said Mohammed Kazmi, fixed income strategist for UBP.

Market participants will therefore be keeping a keen eye out for any clues from ECB chief Christine Lagarde when she speaks at 12.30 GMT on how she sees the rest of the year panning out if growth and inflation pick up, he said.

Also at 12.30 GMT, U.S. inflation data is due out, with a Reuters poll expecting consumer prices to have risen 4.7% from a year before in the world's largest economy. (Reporting by Abhinav Ramnarayan, Additional reporting by Ritvik Carvalho; Editing by Giles Elgood and Pravin Char)

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.