Euro Zone Bond Yields Rise, Focus On UK Gilts, Inflation Data

Euro zone government bond yields rose on Thursday as German data shifted the market focus to surging inflation, while gilt investors resumed selling after the Bank of England (BoE) stepped in to quell a storm the day before.

Euro area yields had plunged on Wednesday, tracking moves in UK gilts as the BoE announced the immediate launch of an emergency bond-buying programme to prevent the market turmoil from spreading.

Analysts were cautious about the BoE measures, arguing that to restore markets' confidence, the British Treasury needs to announce a credible plan to get debt under control.

Germany's 10-year government bond yield, the benchmark of the bloc, rose 11 basis points (bps) to 2.25%. It hit its highest since December 2011 at 2.35% on Wednesday.

The UK 10-year gilt yield rose 16 bps to 4.16%, after falling almost 50 bps the day before.

"Markets calmed down after the BoE stepped in. However, the BoE move, without a change in political direction, might not be a turning point on its own," Chris Attfield, European rates strategist at HSBC, said.

German inflation likely grew significantly in September based on initial data from its most populous state, which saw the biggest jump since the early 1950s, according to its statistics office. [nL8N3101ZE]

Germany's federal statistics office will publish a flash estimate for nationwide September data later Thursday.

"If (North Rhine-Westphalia numbers are) mirrored by data from other federal states, which are due to be published in the morning, consumer prices may rise by nearly 10% year-on-year," UniCredit analysts said in a note.

"We expect inflation rates to remain exceptionally high until the end of the year before likely gradually subsiding."

Analysts polled by Reuters expect EU-harmonised consumer prices (HICP) data, which are due on Friday, to have increased by 10% in September.

European Central Bank policymakers continued to line up behind another big interest rate hike as inflation is set to hit a new record high, but differed on whether it was time to think about mopping up cash from the economy. [nL1N3100F2]

"Markets are pricing a high probability of two ECB rate hikes of 75 bps by year-end, and we are inclined to agree with that. The hawks are in control, and the real question is what will happen next year," HSBC's Attfield argued.

Italy's 10-year government bond yield rose 9 bps to 4.67%, after hitting its highest level since February 2013 at 4.927% the day before.

The spread between Italian and German 10-year yields was at 242 bps.

Analysts said that while Italian politics do not affect the bond market much, the main worries for Italian bond investors are a possible quantitative tightening by the ECB and a further rise in inflation across the euro area.