German bond yields extend gains on inflation, Greek deal prospects

German bond yields rose on Wednesday, extending gains a day after their biggest daily rise in nearly three years after a surprise uptick in inflation and the prospect of a deal to unlock Greek aid.

The move, which formed part of a global markets sell-off after data showed a better-than-expected rise in consumer prices on Tuesday, was more pronounced after Greece’s creditors drafted an agreement to try to break a four-month funding deadlock with Athens.

ECB policy meet

It also comes ahead of a policy meeting of the European Central Bank where investors will tune in to see what its head Mario Draghi has to say about a 60 basis point rise in Bund yields since its last meeting six weeks ago.

Given the scale of the increase, strategists are expecting Draghi to reinforce that the ECB’s €1 trillion asset purchase scheme will run to September 2016 as planned even if rising staff inflation forecasts suggest the scheme is making waves.

“We are not assuming that the ECB is going to start gearing its monetary policy to short-term market movements,’’ said DZ Bank strategist Birgit Figge.

“In our opinion, the central bank will not provide any fuel to inflame the ‘tapering’ discussion which has been repeatedly surfacing in recent weeks.’’

10-year yields

German 10-year yields — the benchmark for euro zone borrowing — rose 3 basis points to 0.72 basis points, following a 17 bps surge on Tuesday. That was the biggest daily rise seen since August 2012, according to Reuters data.

The volatile backdrop will prove a strong test of demand for Germany’s sale of five-year debt on Wednesday. Germany also announced it would sell its first ever 30-year inflation-linked bond via a syndicate of banks in coming weeks.

Lower-rated debt fared better on improved prospects of a reforms-for-cash deal for Greece, which could avert a default by the country and its potential exit from the currency union.

Greek 10-year yields fell 15 bps on Wednesday to 11.27 per cent. Portuguese, Spanish and Italian equivalents were all 1 bps lower at 2.83 per cent, 2.09 per cent and 2.06 per cent, respectively.

Greece’s creditors had on Tuesday drafted the broad lines of an agreement to put to the leftist government in Athens. But uncertainty remains whether Prime Minister Alexis Tsipras will accept the deal if it involves cuts in pensions and job protection, areas he has pledged to safeguard.

French Economy Minister Emmanuel Macron said on Wednesday he was confident an agreement between Greece and its creditors could be reached.

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