Euro zone bond yields climbed yesterday, but kept well below recent highs, as a rise in German inflation further above the ECB’s target in May failed to weaken support to bond markets from the recent dovish turn of the bloc’s central bankers.

Though yields started the week higher, they stayed far below recent highs, as expectations of a dovish tone from the European Central Bank at its 10 June meeting continued to drive the market.

Bond yields rose sharply earlier in May driven by a brighter economic outlook, prompting speculation the ECB may slow its pandemic emergency bond purchases (PEPP). But comments from ECB President Christine Lagarde and other policymakers that it is too early to remove the support have brought down bond yields.

Inflation has been bond investors’ key focus this year, driven higher by pent-up demand and supply constraints as economies reopen, and whether it will be transitory as central bankers argue.

German inflation in May rose 2.5pc year-on-year, the highest since 2011, data showed yesterday, accelerating further above the ECB’s “close to but below 2pc” target and above expectations in a Reuters poll.

But the EU-harmonised figure rose 2.4pc year-on-year, slightly below expectations in a Reuters poll.

Earlier in the session, data showed Spanish inflation at the highest since 2017, while the Italian reading remained more subdued, as expected.

Germany’s 10-year yield, the benchmark for the bloc, was up nearly two basis points to -0.17pc by yesterday lunch time, around levels it had risen to earlier in the session. Yields rose as a key gauge of long-term euro zone inflation expectations climbed above 1.6pc for the first time in nearly two weeks.

But with yesterday’s data showing the range of potential inflation drivers in full swing, the ECB won’t be able to avoid the question of when it will taper PEPP for long and the discussion will gain momentum over the summer and after, according to Carsten Brzeski, global head of macro at ING.