On the supply front, Germany will sell some €2.5 billion ($2.88 billion) in 2038 and 2053 bonds, having met with good demand for €4.6 billion in 5-year Bobls sold on Tuesday for an average yield of 2.93%. This was the highest for this maturity at auction this year and well above the 2.32% achieved a year ago.
"As the auctions are skewed towards the (ultra-)long end, they could temporarily weigh on markets, although we expect issuance to be absorbed well similar to yesterday's OBL auction," Commerzbank said in a note.
The U.S. Treasury, meanwhile, will sell some $42 billion in new benchmark 10-year notes.
($1 = 0.8669 euros)
Supply and inflation outlook keep markets cautious
Another round of attacks on shipping in the Gulf on Tuesday boosted oil prices above $89 a barrel and risked damaging the prospects for bringing the Iran war to a prompt end, something bond investors are counting on to avoid a more protracted rise in global inflation, which hurts fixed-income assets in particular.
U.S. inflation data for July on Wednesday could prove instrumental in setting expectations for whether the Federal Reserve raises rates in September or not. Right now, money markets show a 50/50 chance of an increase, so a surprise could impact Treasuries and have a knock-on effect on bond markets elsewhere.
Swaps that reflect market-based expectations for euro zone inflation in a year's time EUCPIZ1Y=TWEB are around 2.4%, back above the European Central Bank's target of 2%, having fallen below this level in early July, before President Donald Trump declared a memorandum of understanding between the United States and Iran aimed at peace to be "over". It is well off June's highs around 3.8%.
A U.S. swap is still below 2% USCPIZ1Y=TWEB, showing there is less concern among investors about inflation in the world's largest economy, which is also a net oil exporter.
Euro zone yields edge lower as traders await U.S. inflation data
Euro zone government bond prices edged up early in Europe on Wednesday, while investor caution ahead of potentially market-moving U.S. inflation data kept trading activity muted.
This week also brings a large round of new bond supply from Germany and the United States, holding auctions on Wednesday.
Bund and Schatz moves remain tied to inflation and policy expectations
Benchmark 10-year German Bunds DE10YT=RR dipped 2 basis points to 3.163%, set for a 3-bp rise so far this week, while 2-year Schatz yields DE2YT=RR, which are more responsive to shifts in expectations for inflation and monetary policy, were flat at 2.785%.
So far in August, most major economy bonds have gained in price, which has sent yields lower, as optimism over some sort of peace deal in the Middle East pushed oil lower in the first week.
Yields have since rebounded, as that optimism has proven hard to sustain in the face of renewed attacks and no agreement on the conditions for marine traffic to transit the Strait of Hormuz, a key chokepoint for world energy markets.
TLT•
