UPDATE 1-Euro zone yields fall as bond selloff eases

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds analyst comment, 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.

St. Louis Federal Reserve President James Bullard added momentum to the bond sell-off on Tuesday by cautioning that high inflation may require more aggressive steps from the central bank, including two interest rate hikes in 2022.

U.S. borrowing costs dropped in London trade, with the 10-year Treasury yield down 3.5 basis points to 1.5%.

Germany’s 10-year government bond yield fell 2 basis points to -0.217%.

“Bunds are not immune” to a recent repricing of global inflation and rates expectations in the United States, Commerzbank analysts told clients.

They noted Bunds had outperformed versus other European government bonds as well as versus U.S. Treasuries and UK Gilts during the selloff.

However, on Wednesday, Italian bonds were the star performers, with 10-year BTP yields falling 5 basis points to 0.81%.

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.

“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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