Bund yield hits 1 percent as stock markets halt sell-off

[June 10, 2015] By Lionel Laurent

LONDON (Reuters) - German bond yields hit 1 percent for the first time since September on Wednesday as long-term inflation expectations rose, luring investors back into equities despite lingering jitters over the size of recent market swings.

Traders pointed to signals that the recent sell-off in stocks had gone too far too fast, especially considering the improving economic and earnings backdrop. That said, the jump in euro zone bond yields had more to do with the banished specter of deflation and weak liquidity than a strong economic rebound.

"The economic picture has improved and deflation fears have ebbed," RIA Capital Markets bond strategist Nick Stamenkovic said.

The pan-European FTSEurofirst 300 share index was up 0.7 percent at 6.55 a.m. EDT, outperforming a 0.2 rise both for MSCI's broadest index of Asia-Pacific shares outside Japan and a 0.4 percent rise in global equities.

Sparinvest trader Claus Mose said that a lack of market liquidity was exacerbating swings in asset prices and that it was too early to say whether shares would keep rebounding. "Liquidity is not good, so it doesn't take a lot of buy interest to move the market ... It's a rebound from lows," he said.
 

Greece's debt drama remained in focus, with Greek markets down after Athens said international creditors had failed to respond to its latest proposal to break an impasse over a cash-for-reforms deal. Some officials in Brussels have privately dismissed the proposal as insufficient for fellow euro zone states to accept.

U.S. equity futures were up 0.4 percent.

Wild fluctuations in bond markets as investors revise inflation and interest rate expectations have sapped investor confidence in recent weeks.

Markets increasingly expect the U.S. Federal Reserve to hike interest rates before the year is out while the European Central Bank's stimulus program to revive the euro zone economy is seen pushing inflation slowly toward its near 2 percent target.

The U.S. dollar index hit a three-week low, with analysts pointing to debate around the G7 summit regarding the speed of the dollar's rise as the U.S. prepares to end years of ultra-loose monetary policy.

The yen surged to a two-week high after the head of the Bank of Japan said the currency was unlikely to fall further because it was already "very weak".

Traders said investors had cut back their positions amid the volatility and said the sell-off in bonds was likely to go on.

In commodities, oil prices rose as U.S inventories were set to drop further and after the Energy Information Administration (EIA) raised its 2015 oil demand growth forecast.

Mainland Chinese shares, currently dominated by local retail investors, see-sawed after U.S. index provider MSCI Inc <MSCI.N> said on Tuesday it will hold off including China-listed shares in its widely tracked indexes. Hopes for fresh stimulus buoyed the market despite the initial setback.

MSCI also said it expects China-listed shares to be incorporated once outstanding market accessibility issues are resolved, a move that could inject an estimated $400 billion of funds from asset managers into mainland shares.

The Turkish lira rose 0.7 percent after two days of losses that saw it hit record lows against the dollar on post-election uncertainty and Fed rate hike expectations, while higher oil helped the Russian rouble firm 1.5 percent.

(Editing by Catherine Evans)

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