Article Highlights

  • Bund yields reverse early falls to one-week low
  • Impact of U.S. bond-yield drop fades
  • Pre-ECB meeting caution sets in
  • Euro zone periphery govt bond yields
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Euro zone bond yields drifted higher on Wednesday, reversing early falls, as the impact of strong gains in the U.S. bond market faded and focus turned to higher oil prices and the need for caution a day before a keenly anticipated ECB meeting.

U.S. Treasury yields fell to almost 10-month lows on Tuesday as worries about further nuclear tests by North Korea and the impact of powerful storm Irma sparked demand for safe-haven assets. When a bond yield falls, its price rises.

That provided a positive backdrop for European bond markets, with German 10-year yields hitting their lowest levels in just over a week in early trade.

But as the session wore on, bond yields across the bloc reversed course, rising 1-2 basis points. Analysts said a rise in oil prices helped explain the move.

Brent crude oil prices rose almost 1 percent to their highest levels since May as strong global refining margins and the reopening of U.S. Gulf Coast refineries provided a more bullish outlook after sharp drops due to Storm Harvey.

“We’ve got the oil price higher, which is something that is often consistent with a move higher in bond yields,” said Chris Scicluna, head of economic research at Daiwa Capital Markets.

“After such a significant downward move in U.S. Treasury yields, there’s also a bit of retracement there.”

Germany’s 10-year bond yield was up 1 basis point at 0.35 percent, up from one-week lows hit earlier at 0.325 percent.

Two-year German bond yields were also marginally higher on the day, having touched minus 0.79 percent, their lowest levels since April.

With the European Central Bank meeting on Thursday, analysts said there was a reluctance to push bond yields down too sharply despite a number of supportive factors such as the North Korea tensions.

The ECB will be closely watched for any signs that the central bank has become uncomfortable with the euro’s recent strength, a concern that could delay it from winding back its massive monetary stimulus scheme.

“I think they will be careful not to push any major changes, they are wary of the exchange rate,” said Robert Skelton, a portfolio manager at Mediolanum Asset Management.

Elsewhere, Germany sold around 2.4 billion euros of five-year bonds.