(Add details, comment, update prices)

By Yoruk Bahceli

June 30 (Reuters) – Short-term German bond yields fell to their lowest level in more than three weeks and the cost of insuring exposure to corporate debt jumped on Thursday as markets continued to rise. trade on growth risks.

The fastest cycle of raising interest rates in decades to fight soaring inflation has hit consumer demand, adding to investor fears of slowing growth or an outright recession. Central bankers signaled again this week that they will prioritize fighting inflation over growth.

Data from France on Thursday showed annual June inflation was slightly higher than expected at a record 6.5% ahead of a eurozone-wide print on Friday, the last the ECB will examine before her political meeting on July 21, where she is expected. increase rates by 0.25%.

But the monthly figures were in line with expectations from a Reuters poll, while property price inflation eased.

Germany’s two-year yield, the most sensitive to interest rate expectations, fell 16 basis points to 0.667%, the lowest since June 9.

The 10-year rate, the euro zone’s benchmark, fell nearly 10 basis points to 1.41% at 11:02 GMT, adding to a 13 basis point drop on Wednesday.

“It’s probably a combination of things. A little relief that French inflation wasn’t higher, but also risk assets are really starting to deteriorate now. It’s a pessimistic decline in risk assets that’s driving probably short hedging or a little bit of buying in rates,” said Peter McCallum, rates strategist at Mizuho.

Italy’s 10-year yield fell 6 basis points to 3.43%, with the closely watched spread over its German counterpart widening slightly to 202 basis points.

The moves come on top of a plunge in bond yields on Wednesday after German inflation unexpectedly fell in June, although economists warned this was due to one-off effects and Spanish data showed inflation much higher than expected to be more than 10%.

“There is a broader recession risk narrative playing out in the markets, but not a lot of new headlines (Thursday) to support it,” said Antoine Bouvet, senior rates strategist at ING.

“There’s a growing sense that the inflation narrative is giving way to recession as the primary focus of the markets.”

End-of-month flows in bond markets and upcoming flows from German bonds in July could also support bonds, Bouvet said. Bond yields move inversely to prices.

In further signs of recession fears, the cross-index iTraxx Europe, which measures the cost of insuring exposure to high-yield, lower-quality European corporate bonds, rose above 600 basis points for the first times since April 2020.

It rose rapidly by around 430 basis points at the start of the month.

A similar CDS index for investment-grade debt also rose sharply, to 122 basis points, the highest since March 2020.

“Liquidity in the corporate credit markets is low, very low,” Andrew Balls, global chief investment officer for fixed income at PIMCO, said in a media webinar.

Later in the session, investors will be watching the US Federal Reserve’s favorite inflation gauge, the Personal Consumption Expenditure Core Index. (Reporting by Yoruk Bahceli; Editing by Alex Richardson and Hugh Lawson)