German 10 - year bonds set for best week of the year

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On Friday, the Benchmark German 10-year bonds were set for their best week of the year as a dovish outcome to the ECB meeting a day earlier continued to support euro area bond prices.

The European Central Bank maintained an increased pace of pandemic emergency bond purchases on Thursday for the third quarter, for which it is clear that there has been an elevated trend of suddens and anomalies in the European Union.

Although underlying inflation was expected to stay lower than the ECB target for this year and next, the current economic projections are still expected to increase by at least 2023, suggesting that easing of support will be retained in the aftermath of the PEPP program, which expires next year.

On Friday, Euro area borrowing costs fell to their lowest since late April in a broader fixed income rally that also saw the U.S. Treasury and UK convertible yields fall. Following a short rise, on Thursday Treasury yields hedged high-than-expected May inflation data and were set for their largest weekly fall in a year by investors covered shorts.

In early Friday trade, Germany's 10 year Yield, the benchmark for the region, is down further 3 basis points in its biggest weekly fall in 2021. Bond yields move inversely with prices.

Italian bonds, which outperformed the ECB on Thursday, continued to rally on Friday with Italy's 10-year yield at 0.77%, with the closely monitored risk premium over southern European bonds close to one-month lows at 104 bps.

Now that the next potential taper announcement is delayed for September, the environment of large negative net supply in may be providing investors with a level of comfort to position in carry trades, BofA strategists told clients.

Analysts usually expect euro area yields to trade range bound in the foreseeable future.

The big upside changes to 2021 growth also provides some cushion in terms of the impact that better data can have on tightening expectations, added BofA.

However, the focus remains on the ECB after sources told Reuters that 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. What is a lot of good stuff?

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