January 26, 2018 / 12:40 PM / a year ago

UPDATE 2-German bond yields jump after ECB's Coeure warns on inflation risks

(Adds Kuroda remarks, updates prices)

By Dhara Ranasinghe and Fanny Potkin

LONDON, Jan 26 (Reuters) - German two-year bond yields rose to their highest level in almost seven months and five-year yields hit two-year highs on Friday, after the European Central Bank’s Benoit Coeure said he saw complacency in financial markets towards inflation risks.

The comments from the ECB board member came a day after the ECB surprised markets by striking a modestly dovish tone in the face of a robust euro, sparking a sell-off across euro zone debt markets.

Later in the session, the trend got more support when Bank of Japan Governor Haruhiko Kuroda said inflationary expectations are picking up in Japan.

The two-year Schatz yield rose to minus 0.545 percent , up around 2.5 basis points on the day.

Five-year German bond yields hit their highest level in over two years at minus 0.03 percent — within sight of zero percent.

“In general, the fact that Coeure sounded optimistic on growth and inflation on a global level may be pushing yields a little further up today after the European Central Bank meeting yesterday,” said Mizuho strategist Antoine Bouvet.

German long-dated yields were set for their sixth straight week of rises, their longest run of weekly increases since 2010 , according to Reuters data.

The ECB decided on Thursday left policy unchanged, but it said it had gained confidence that inflation would rise back to its target of just below 2 percent.

The bank’s Survey of Professional Forecasters showed on Friday that euro zone inflation may be faster in the coming years while long-term projections remain steady.

Most 10-year euro zone bond yields were up 1 to 3 basis points on the day. Germany’s Bund yield headed back towards the six-month high of 0.579 percent hit on Thursday.

“Given the strengthening of the economic data, a lot of investors are inclined to think that purchases of new securities will stop at the end of September,” said Mark Dowding, a portfolio manager at BlueBay Asset Management.

“I think that is largely discounted and the debate is moving towards what is the timing of the first rate hike and what will be the trajectory of rates after that.”

The German government bond yield curve was at its flattest in almost six weeks, as the 30-year Bund yield fell to 2 1/2- week low at 1.257 pct, down 5 bps on day.

Germany was also in focus on Friday, as a new round of negotiations for a coalition government began, which could strengthen demand for safe-haven assets.

Earlier in the day, Italy sold over 1.7 billion euros of inflation-linked bonds.

Reporting by Dhara Ranasinghe & Fanny Pokin, aditional reporting by Abhinav Ramnarayan, editing by Toby Chopra

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