(Recasts, adds details and comments, updates prices)<\/p>\n
Aug 31 (Reuters) – Benchmark German bond yields rose to the highest in over five weeks on Tuesday after a higher than expected inflation reading and an ECB policymaker called on the bank to reduce its emergency bond purchases as soon as the next quarter.<\/p>\n
Robert Holzmann, governor of Austria\u2019s central bank, said the bank was in a situation where it can think about reducing buying and added he expected the issue to be discussed at the bank\u2019s policy meeting next week.<\/p>\n
Holzmann\u2019s comments followed first estimate data showing inflation increased to 3% year-on-year in August, the highest in a decade, far above the European Central Bank\u2019s 2% target and a 2.7% forecast by a Reuters poll.<\/p>\n
Core inflation, a narrower reading that strips out volatile food and energy costs, also rose to 1.6%, compared to expectations for a 1.4% rise.<\/p>\n
Germany\u2019s 10-year yield, the benchmark for the euro area, rose as much as 4 bps to -0.393%, the highest since Jul 22.<\/p>\n
Italian 10-year yields rose 6 bps to 0.68%, pushing the closely watched gap with German 10-year yields to 108 bps.<\/p>\n
\u201cHolzmann definitely accelerated the move higher in yields but it started earlier in the day and continued afterwards. Inflation was a factor, although I would argue that the immediate policy implications are limited,\u201d Antoine Bouvet, senior rates strategist at ING, said.<\/p>\n
Though bond markets have closely focused inflation readings this year, initial price action following the data was limited.<\/p>\n
Inflation came in above the European Central Bank\u2019s target for a second consecutive month and was expected to rise further over the remainder of this year.<\/p>\n
However, the increase is considered to be temporary as it is driven by transitory factors and policymakers say it will languish well below the bank\u2019s target for years to come.<\/p>\n
Ludovic Colin, portfolio manager at Vontobel Asset Management, said the European Central Bank\u2019s new symmetric 2% inflation target, which allows for temporary overshoots, was keeping markets calm regarding rising inflation.<\/p>\n
Elsewhere, following the summer lull, issuance will see the busiest week since mid-July, Commerzbank said.<\/p>\n
On Tuesday, Italy raised 7.75 billion euros ($9.17 billion)from the re-opening of five and 10-year bonds, alongside a seven-year floating-rate bond, with the five-year issued at a record low yield of -0.01%.<\/p>\n
The Netherlands raised 2 billion euros from the re-opening of a four-year bond.<\/p>\n
Further supply is expected as soon as Wednesday, with Greece hiring a syndicate of banks to re-open a five and a 30-year bond, and Germany hiring banks to sell a new 30-year bond on Tuesday.<\/p>\n
\u201cI think supply pressure also shoulders some of the blame (for the sell-off),\u201d ING\u2019s Bouvet said.<\/p>\n
($1 = 0.8450 euros)<\/p>\n