Key market euro zone inflation gauge hits highest since 2012

Oil prices also continued rising after a 6% surge a day earlier as Russia said that peace talks with Ukraine had hit a dead end. With inflation concerns dominating, euro zone bond yields initially rose. That pushed the euro zone inflation gauge lower, to around 2.36%. Euro zone bonds underperformed U.S. Treasuries, where 10-year yield were down 5 bps following producer prices data.

A key market gauge of long-term euro zone inflation expectations briefly rose above 2.40% on Wednesday, scaling a 10-year peak with a higher-than-expected inflation reading in Britain adding to signs of persisting price pressures. It is the highest the five-year five-year breakeven forward has risen since 2012, according to data from the European Central Bank, and far above the 2% target of the bank, which meets on Thursday.

"It will definitely be testing their resolve and their stance. It's definitely a problem. There's a lot of arguments that they’ve put forward to diminish the importance of this indicator," said Antoine Bouvet, senior rates strategist at ING. The gauge has risen from around 2.20% before Russia's invasion of Ukraine and around 2% at the start of the year.

"It shows at least one thing - there are concerns out there that inflation is out of control," Bouvet added, though he said such a risk was small and not a widely held view. A Reuters poll last week showed economists still expect euro zone inflation, which hit 7.5% in March, to peak during this quarter.

Data on Wednesday showed British inflation climbed to 7.0% in March from 6.2% in February, its highest since March 1992 and by more than expected by most economists. Oil prices also continued rising after a 6% surge a day earlier as Russia said that peace talks with Ukraine had hit a dead end.

With inflation concerns dominating, euro zone bond yields initially rose. But by 1411 GMT, Germany's 10-year yield, the benchmark for the bloc, was down a basis point at 0.78%, following U.S. Treasury yields lower, after rising nearly 7 bps in early trade. That pushed the euro zone inflation gauge lower, to around 2.36%.

Euro zone bonds underperformed U.S. Treasuries, where 10-year yield were down 5 bps following producer prices data. Bond yields move inversely with prices. Though the data showed producer prices increasing more than expected, it followed the U.S. March inflation reading, which showed underlying inflation pressures moderated as goods prices, excluding food and energy, dropped by the most in two years, suggesting to some that inflation may have peaked.

Italian 10-year yields were down 3 bps, pushing the closely-watched risk premium over German bonds down to 159 bps from 164 bps in earlier trade. At an auction of five bonds which raised 8 billion euros Italian borrowing costs jumped to their highest level in several years.

Elsewhere, money markets continued pricing in around 70 bps of ECB rate hikes by December.