June 11 (Reuters) - Benchmark German 10-year bonds were set for their best week of the year on Friday, as a dovish outcome to the ECB meeting a day earlier continued to support euro area government bond prices.
On Thursday, the European Central Bank maintained an elevated pace of pandemic emergency bond purchases (PEPP) for the third quarter
Though it upgraded its economic projections for this year and next, underlying inflation is still expected to stay below the ECB’s target at least through 2023, suggesting that support will be maintained in the aftermath of the PEPP programme, which expires next year.
Euro area borrowing costs fell to their lowest since late April on Friday in a broader fixed income rally, which also saw U.S. Treasury and UK gilt yields fall. After a brief rise, Treasury yields ignored higher-than-expected May inflation data on Thursday and were set for their biggest weekly fall in a year as investors covered shorts.
Falling another 3 basis points to -0.28% in early Friday trade, Germany’s 10-year yield, the benchmark for the region, is down over 6 basis points this week in its biggest weekly fall in 2021. Bond yields move inversely with prices.>
Southern European bonds, which outperformed following the ECB on Thursday, continued rallying on Friday, with Italy’s 10-year yield down 3 basis points to 0.77%, keeping the closely-watched risk premium over German bonds close to one-month lows at 104 bps.
“Now that the next potential taper announcement is pushed to September, the environment of large negative net supply in (the second half of the year) may be providing investors with comfort to position in carry trades,” BofA strategists told clients.
Analysts mostly expect euro area yields to trade range-bound in the foreseeable future.
“The ECB’s large upside revision to 2021 growth also provides some cushion in terms of the impact that better data can have on tightening expectations,” BofA added.
But focus remains on the ECB after sources told Reuters three of the 25 members of the Governing Council wanted to reduce the pace of the purchases at the meeting, citing a better outlook for growth and inflation.
(Reporting by Yoruk Bahceli; Editing by Toby Chopra)