Euro zone bond yields hold ground ahead of US CPI

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Euro zone bonds calmed on Friday after two sessions of volatility ahead of a critical US inflation reading that will set the tone ahead of a flurry of central bank meetings next week.

Bond yields fell, then jumped on Wednesday on Britain’s new COVID-19 restrictions and BioNTech and Pfizer saying a booster of their vaccine had been effective against the Omicron variant.

Yields fell sharply on Thursday, helped in part by a Reuters report that European Central Bank policymakers are homing in on a temporary increase of the bank’s conventional bond purchases after a much larger pandemic-fighting scheme ends in March.

Trading was poised for more calm on Friday, with Germany’s 10-year yield up one basis point to -0.34% by 1117 GMT.

Italy’s 10-year yield was unchanged at 1.00%, with the closely watched gap between Italian and German 10-year yields holding at 133 bps, after rising to near the highest in a year at 136 bps on Thursday.

A Reuters poll expects the inflation data due at 1330 GMT to show US consumer prices rose another 6.8% year-on-year in November, up from 6.2% in October.

“The comments from Fed Chairman Powell that inflation may not be as transitory as the Federal Reserve thought highlight the risk ahead of the FOMC meeting next week,” said Jens Peter Sorensen, chief analyst at Danske Bank.

At the Fed’s meeting next week, investors will watch whether the bank accelerates the tapering of its bond purchases and for any changes in its rate hike projections.

Meetings by the Bank of England and the European Central Bank will follow the Fed within 24 hours, in what is likely to be a volatile period for markets.

Sorensen, however, said markets on Friday were balancing out risks from the inflation print with uncertainty stemming from the Omicron coronavirus variant and the Chinese property sector, where developers Evergrande and Kaisa Group were downgraded by Fitch Ratings, which said they had defaulted on their offshore debt.

Elsewhere, the three-month Euribor interbank borrowing rate fell to a record low for the second day in a row at -0.588%.

Austria became the latest member state to announce its funding plans for next year, which will remain roughly steady, and will launch its first green bond in the second quarter of 2022 to raise at least 3 billion euros ($3.38 billion).

After the session close Fitch Ratings will review Spain’s credit rating, currently at A minus with a stable outlook.