Euro zone bond markets calm as inflation surges past ECB target

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.
 

Data showed inflation in the 19 countries sharing the euro accelerated to 2% in May from 1.6% in April, driven by higher energy costs to its fastest rate since late 2018 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.
 

"The proximity to the ECB meeting is shielding euro zone rates from the fallout of higher CPI and higher PMIs this morning," said ING senior rates strategist Antoine Bouvet.
 

"This is short-sighted I think and the rate rises should resume after the pre-ECB pause."
 

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.
 

There was also some focus on long-term inflation expectations as oil prices topped $70 on optimism for stronger demand in the months ahead.
 

A key gauge of the market's long-term euro zone inflation expectations, the five-year, five-year breakeven forward, rose to 1.61%, its highest in nearly two weeks.