Advertisement

UPDATE 2-Euro zone bond yields fall, real yields at fresh lows

* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr (Updates prices)

By Dhara Ranasinghe

LONDON, July 27 (Reuters) - Government bond yields across the euro area fell on Tuesday, with German Bund yields holding close to 5-1/2 month lows hit the previous session while real bond yields slipped to fresh lows.

Weak equity markets, undermined by a third straight session of selling in Chinese internet giants, supported demand for safe-haven bonds. But overall activity was generally subdued ahead of a two-day U.S. Federal Reserve meeting starting later.

Germany's benchmark 10-year Bund yield was down 2.5 basis points (bps) at -0.439% by 1522 GMT, near a 5-1/2 month low of -0.449% touched briefly on Monday. Most other 10-year yields in the euro area were around 1 bps lower .

"We doubt there will be much appetite from market participants to add new positions ahead of tomorrow’s FOMC event risk but we cannot exclude profit taking on tactical longs opened in the July rally," said ING senior rates strategist Antoine Bouvet.

Most 10-year bond yields across the euro area have fallen 20 basis points this month as investors question global reflation trades and concerns about coronavirus Delta variants rise to the top of their worry list.

Such concerns have also helped push down real or inflation-adjusted bond yields.

In Europe, Germany's inflation-linked bond yields extended recent falls to hit a new low at around -1.747%.

"The fall in real yields is an interesting development, they reflect some degree of pessimism, which is a bit contradictory to other parts of the market such as credit and equities," said DZ Bank rates strategist Christian Lenk.

The euro area real yield, which strips out the impact of expected inflation as measured by swaps, fell to a new record low at around -1.61%, . It is another gauge tracked closely by analysts.

A key measure of long-term expectations in the euro area, the five-year, five-year breakeven inflation forward meanwhile rose to 1.65%, its highest level since late 2018.

While the yield on 10-year Treasury Inflation-Protected Securities (TIPS) also fell to a new record low on Tuesday, U.S. breakeven inflation rates have also risen this week.

"This combination of historically negative real yields and elevated breakeven rates is, to us, symptomatic of a recovery in which inflation expectations are increasing due to cost push pressures (and therefore are transitory in nature)," analysts at Rabobank said in a note.

(Reporting by Dhara Ranasinghe, additional reporting by Danilo Masoni Editing by Tomasz Janowski, Susan Fenton and Bernadette Baum)