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Reflation Bond Sell-Off Takes Breather; Focus on ECB Minutes

AMSTERDAM, Feb 18 (Reuters) - Euro zone bonds showed further signs of stabilisation after a hefty sell-off driven by expectations of rising inflation, with German yields barely edging up.

Expectations of economic recovery from the COVID-19 crisis and extraordinary fiscal stimulus in the United States caused a surge in global bond yields led by U.S. Treasuries in recent sessions.

But, with stock markets weakening on Wednesday, the sell-off showed signs of a pause.

In the euro zone, after rising 11 basis points in three sessions to its highest since June 2020, Germany’s 10-year Bund yield dipped 1 basis point on Wednesday. On Thursday, its yield was up less than a basis point at 0830 GMT at -0.36%.

Christian Lenk, rates strategist at DZ Bank, said the pause to the sell-off shows “some kind of exhaustion” with the reflation trade for the time being, although he expects the trade to hold up in the longer term.

Lenk added the Federal Reserve minutes, in which it displayed willingness to steer past coming inflation, may have “led to some rethinking of market participants that the inflation trade has run a little too far.”

Market focus on Thursday is on the ECB, which is due to release the minutes for its January meeting at 1230 GMT. “Comments with the most market-moving potential would be on how the ECB is to react to a further rise in the euro,” ING analysts told clients.

At the meeting in January the ECB kept its policy rate and stimulus package unchecked, but its messaging had been perceived as hawkish, causing a big sell-off in Southern European bonds.

Governing council member Klaas Knot said afterwards that the ECB was ready to cut its deposit rate further below zero if necessary to keep its inflation target in sight.

The euro rose to its highest since 2018 above $1.23 in early January. It has eased since to around $1.205 currently, but is still up 8% since the start of 2020.

In the primary market on Thursday, Spain is scheduled to raise up to 5.5 billion euros from an auction of bonds due between 2024 and 2040, while France will raise up to 10.5 billion euros from bonds due between 2024 and 2029, and up to 1.75 billion euros from inflation-linked bonds due between 2026 and 2047.

(Reporting by Yoruk Bahceli Editing by Raissa Kasolowsky)

Source: Reuters

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