Euro zone bond yields do an about-turn after U.S. inflation data

© Reuters. FILE PHOTO: The European Central Bank (ECB) logo in Frankfurt, Germany, January 23, 2020. REUTERS/Ralph Orlowski

By Dhara Ranasinghe

LONDON (Reuters) -Euro zone government bond yields rose on Wednesday after data showing a bigger-than-expected rise in U.S. inflation last month suggested price pressures in the world's biggest economy remain strong, keeping pressure on the Federal Reserve.

Earlier in the session, yields across the currency bloc fell to their lowest levels in almost a week, with investors taking comfort from signs that any tightening in European Central Bank monetary policy will be gradual.

The ECB is likely to end its bond-buying stimulus programme early in the third quarter, followed by a rate hike that could come just "a few weeks" later, ECB President Christine Lagarde said.

But data showing U.S. annual inflation rose 8.3% in April, down from 8.5% a month earlier, but above analyst expectations for an 8.1% rise, triggered a few wave of selling in bonds.

Germany's 10-year Bund yield was last up 6.4 basis points on the day at 1.07%, having fallen just below 1%, its lowest level in almost a week earlier.

Analysts said the tone of ECB comments on Wednesday suggested a gradual rather than rapid rate-hike path, taking the edge off the aggressive rate-rise bets that drove borrowing costs across the bloc to multi-year highs as recently as Monday.

The ECB's Francois Villeroy de Galhau said the ECB would start raising rates gradually from the summer.

"One part of the message from the ECB is that rate hikes will start in July, but the other part is that the path will be gradual, which is what Lagarde is suggesting, too," said Jan von Gerich, chief analyst at Nordea.

"The ECB doesn't see an active path of hiking policy like the Fed, so normalisation is going to be gradual and slower than what markets are pricing in," he added, referring to the U.S. Federal Reserve which last week delivered a hefty half-point rate hike, with more expected in coming meetings.

Italian 10-year bond yields also hit their lowest in almost a week at 2.93% before heading higher after the U.S. CPI data. They were last up 2.5 bps on the day just above 3%.

In another volatile session for bond markets, a key gauge of the market's long-term euro area inflation expectations bounced back to almost 2.25% after the U.S. data. It fell to a seven-week low at 2.1939% earlier.

Elsewhere, the European Union priced 9 billion euros of bonds, maturing in 2025 and 2051, according to a memo seen by Reuters from one of the banks managing the syndicated-bond sale.

Germany sold 3.23 billion euros of 10-year Bunds and Portugal auctioned 750 million euros of bonds maturing in 2030.