* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices, adds background)
MILAN, Sept 29 (Reuters) – Euro zone bond yields fell on Wednesday tracking moves in U.S. borrowing costs, which eased overnight as low bond prices attracted traders after an auction showed solid demand.
Bond yields on both sides of the Atlantic have risen since the U.S. Federal Reserve last week gave the latest clues on tapering its asset purchases and hiking interest rates.
Traders paused their selling of U.S. Treasuries and left yields mostly lower – with 10-year borrowing costs down 3 bps to 1.51% – while investors are trying to forecast how negotiations on U.S. spending plans might resolve.
U.S. Treasury Secretary Janet Yellen on Tuesday warned lawmakers that the nation was close to exhausting its borrowing capabilities.
Germany’s 10-year government bond yield fell 2 basis points to -0.217%.
“Bunds are not immune” to a recent repricing of inflation and rates expectations in the United States, “but are outperforming in this environment,” Commerzbank analysts said.
Investors awaited central bank speakers on the second day of the Sintra online forum featuring a high-level policy panel late on Wednesday.
The recent rise in yields “is almost entirely driven” by the increase in inflation expectations, Unicredit analysts said.
“It is difficult to see heavy rhetorical interventions (by central bankers). This would also imply that the trend towards higher yields might continue in the short-term,” they said.
Italian bonds were the star performers on Wednesday, after underperforming during the recent bond sell-off, with 10-year yields falling 5 basis points to 0.81%.
“The market has been repricing a rate hike after recent comments by the ECB and after higher and more persistent inflation,” Lauréline Renaud-Chatelain, fixed income strategist at Pictet Wealth Management, said.
“According to the pricing of Euribor interest rate futures, the first rate hike of 25 basis points will happen in December 2023. At the end of August, expectations for the first hike were in December 2024,” she added.
Euro zone economic sentiment edged higher in September, while inflation expectations continued to rise among manufacturers and consumers alike, according to data from the European Commission’s economic sentiment indicator.
Citi analysts saw a possible slowdown in European Central Bank (ECB) asset purchases this week, citing “some recent seasonality seen for the last week of the month”.
As part of its quantitative easing programme, the ECB accelerated its money printing, buying a net 26.420 billion euros ($30.86 billion) of assets last week, above the 21.544 billion euros it purchased a week earlier.
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