Hopes for U.S. debt ceiling deal send German bond yields to 2-week high

U.S. President Joe Biden and congressional Republican Kevin McCarthy said on Wednesday they were determined to reach a deal soon to raise the federal government's $31.4 trillion debt ceiling. Germany's 10-year government bond yield, the benchmark for the euro zone, rose to its highest since May 2, up 7 basis points (bps) on the day to 2.40%.

Euro zone bond yields rose to the highest in weeks on Thursday as risk sentiment improved on optimism that the United States could reach a deal to raise its debt ceiling and avoid a default in the world's largest economy. U.S. President Joe Biden and congressional Republican Kevin McCarthy said on Wednesday they were determined to reach a deal soon to raise the federal government's $31.4 trillion debt ceiling.

Germany's 10-year government bond yield, the benchmark for the euro zone, rose to its highest since May 2, up 7 basis points (bps) on the day to 2.40%. Bond yields move inversely with prices. France's 10-year government bond yield rose to a 16-day high and was last up 7.8 bps on the day to 2.99%.

"Optimism breaks out over potential debt ceiling deal", declared Peter Schaffrik, Global Macro Strategist at RBC Capital Markets. Optimism was also evident in the space of sovereign spreads with the closely watched gap between the German and Italian 10-year yield - a gauge of investor sentiment towards the euro zone's more indebted countries - hitting its narrowest level since early May, tightening below 185 bps.

Italy's 10-year yield, the benchmark for the European periphery, was up 6.8 bps at 4.26%. Strategists said any developments on the U.S. debt ceiling and the risk of a default impasse will bring people's attention back to the European Central Bank's tightening plans.

ECB Vice President Luis de Guindos said on Thursday the central bank will need to keep raising interest rates though most of the tightening has already been done. "Central bankers' consistent message is looking more credible and hikes are being considered again, bear-flattening yield curves," rates strategists at ING said in a note.

Money markets are fully pricing in another 50 bps interest rate by the ECB by September, according to Refinitiv data. The ECB slowed the pace of its interest rate increases earlier this month with a 25-basis-point raise but signalled more tightening was coming as it fights against inflation. It has raised rates in this cycle more than in any other in its 25-year history.

On Wednesday, the EU's statistics office confirmed preliminary data showing euro zone inflation accelerated in April, though underlying price growth slowed a touch.

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