* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr
LONDON, June 1 (Reuters) – Euro zone bond yields drifted higher on Tuesday ahead of a flash reading of inflation in the currency bloc that could challenge a dovish message coming from the European Central Bank.
Analysts polled by Reuters forecast headline inflation rose to 1.9% in May from a year earlier, compared with 1.6% in April.
The ECB, which targets inflation close to but below 2%, has stressed that a rise in inflation was likely triggered by one-off factors and that the long-term outlook remains benign.
Still, the central bank’s dovish tone could be challenged by markets if inflation continues to push higher in the months ahead, analysts said.
Data on Monday showed inflation in Germany, the euro zone’s biggest economy, rose 2.5% year-on-year in May, the highest since 2011.
Germany’s benchmark 10-year Bund yield was 1.2 basis points higher in early trade at -0.17%, but holding below last month’s two-year highs. Most other 10-year euro zone bond yields were slightly higher on the day.
There was also some focus on long-term inflation expectations as oil prices topped $70 on optimism for stronger demand in the months ahead.
On Monday, a key gauge of the market’s long-term euro zone inflation expectations, the five-year, five-year breakeven forward, climbed above 1.60% for the first time in nearly two weeks.
“Yesterday’s upside surprise in German CPI, particularly in the core rate on the back of the notorious packaged tourism component, implies upside risks for today’s euro area flash HICP(inflation),” said Commerzbank rates strategist Michael Leister.
“Combined with the ongoing upside pressure on oil, five-five year breakevens spiked above 1.60% and in the current environment spreads seem more exposed than Bunds and resuming inflation angst given the ECB implications.”
Elsewhere, U.S. 10-year Treasury yields were 2.5 bps higher in London trade, keeping euro zone debt markets on the back foot.
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