AMSTERDAM, Dec 3 (Reuters) - Euro zone government bonds were little changed on Thursday after stimulus hopes drove a sell-off by U.S. Treasuries, while inflation expectations in the bloc rose to their highest since February.
Hopes of a new stimulus package to help the U.S. economy have hit Treasuries in recent sessions. Longer-dated borrowing costs rose in anticipation of the new borrowing and the gap between shorter- and longer-dated borrowing costs grew to its highest since 2018.
Euro zone bond yields jumped on Tuesday alongside U.S. Treasuries, but the rise in yields this week has been more limited in Europe. Its economic recovery is expected to be more difficult and the European Central Bank is largely expected to add to its stimulus next week.
U.S. Treasuries were unchanged in early London trade as lawmakers failed to reach a stimulus agreement, but signs emerged a bipartisan proposal was gaining traction.
Germany’s 10-year Bund yield was down about 1 basis point to -0.53%.
Germany will extend restrictions to stem the new wave of COVID-19, originally due to expire on Dec. 20, until Jan. 10 . Italy will impose restrictions on movement during Christmas; its prime minister is expected to give further details on Thursday.
ING analysts told clients the restrictions, coupled with PMI data showing an acceleration of growth in China’s services sector, presented a mixed picture that probably kept overnight market moves muted.
PMIs in Europe showed Italy, France and Spain’s services contracting, with Italy’s more than expected at the steepest rate since May.
Even so, a key market gauge of long-term euro zone inflation expectations rose to its highest since February, at 1.2559%.
European bond markets are likely to remain steady given the outlook for next week’s ECB meeting, said Annalisa Piazza, fixed income analyst at MFS Investment Management.
“Of course, there is a directionality that also comes from the U.S. and speculation that the U.S. could do more fiscal policy that could lead to a bit of a steepening not just into year end, but could be amplified by some profit taking,” Piazza said. “We cannot rule out a slight steepening of the (yield) curve, but this is not going to take yields much higher than they are now.”
(Reporting by Yoruk Bahceli)