* German bond yields set for biggest monthly rise since Oct 2016
* Bund yields up 26 bps in Jan
* Inflation drops, but “core” inflation picks up
* Fed meeting awaited
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices)
By Dhara Ranasinghe
LONDON, Jan 31 (Reuters) - Bond markets in Europe and the United States looked set on to end January with their worst month since late 2016, a sign that the tide for bonds has turned as a stronger world economy spells the end for ultra-easy monetary policies.
Most euro zone government bond yields were up in late trades. Yields had initially fallen on Wednesday after data showed euro zone inflation was still missing the European Central Bank’s target, while ECB policymaker Benoit Coeure warned that monetary stimulus was still needed.
However, by the end of the trading session, borrowing costs across the bloc had risen 1 to 3 basis points.
The yield on Germany’s 10-year government bond, the benchmark for the region, is up 26 basis points in January at 0.692 percent and set for its biggest monthly rise since October 2016. Germany’s bond yield curve is close to its steepest in around six months, with the gap between 2 and 10-year bond yields around 121 bps, up from 106 bps a month ago.
U.S. 10-year Treasury yields, which this week hit their highest since April 2014, have risen almost 30 bps this month. They are poised for their biggest monthly rise since November 2016.
“Monetary policy looks very inconsistent with the level of growth and inflation,” said Anujeet Sareen, a portfolio manager at Brandywine Global. “Given the normalisation process, the whole bond market looks like it’s just not high enough in terms of yields.”
The jump in global yields this month came as economic data strengthened and, in the euro zone, European Central Bank officials suggested that asset purchases may end sooner rather than later.
Dutch central bank chief Klaas Knot said over the weekend that the ECB should end its asset buys after September but a short phasing-out period was acceptable, sending bond markets into a frenzy. “What bond markets are reacting to is the fact that we’re in the strongest growth environment we’ve had for some time,” said Seamus Mac Gorain, senior fixed income portfolio manager at JPMorgan Asset Management. “We are expecting a material rise in bond yields, it’s just happening more quickly than investors had anticipated.”
Inflation in the 19 countries sharing the euro dipped to 1.3 percent this month from 1.4 percent in December, though core inflation after stripping out energy and unprocessed food prices, moved up to 1.2 percent year-on-year from 1.1 percent the month before.
Meanwhile, the Federal Reserve is expected to leave interest rates unchanged on Wednesday but signal a gradual tightening of monetary policy later this year.
Also on Wednesday, Germany sold 3.204 billion euros of its five-year bonds in an auction.
Reporting by Dhara Ranasinghe, Fanny Potkin, Abhinav Ramnarayan, editing by Larry King