Euro zone bond yields hit one-month high as rate hike bets rise

"It's a wake-up call for euro markets as well, that central banks are not done because inflation still needs to be tamed." Germany's 2-year bond yield, which is highly sensitive to European Central Bank interest rate expectations, rose as much as 5 bps to 2.9%, the highest since April 24.

Euro zone government bond yields rose to their highest levels since the end of April on Wednesday as strong British inflation data reminded investors that the global fight against rising prices is far from over.

Germany's 10-year bond yield rose to 2.501%, the highest since April 24. It then pared its rise slightly and was last up 2 basis points (bps) at 2.477%. Yields - which move inversely to prices - have been creeping higher over the last two weeks as U.S., European and British central bankers have hinted that more rate hikes will be needed to tame inflation.

Data on Wednesday showed that Britain's inflation rate fell much less than expected in April, cooling to 8.7% from 10.1% in March, compared to economists' expectations of a drop to 8.2%. Core inflation, which strips out energy and food, unexpectedly jumped.

"Today's market action is basically driven by what markets have seen in the UK data," said Pooja Kumra, European rates strategist at lender TD. "It's a wake-up call for euro markets as well, that central banks are not done because inflation still needs to be tamed."

Germany's 2-year bond yield, which is highly sensitive to European Central Bank interest rate expectations, rose as much as 5 bps to 2.9%, the highest since April 24. It was last at 2.868%. Traders increased their bets on ECB rate hikes on Wednesday. The November 2023 ESTR forward rose to 3.74%, implying a peak ECB rate of around 3.84%, the highest expected rate since late April.

The impasse between Democrats and Republicans over the U.S. debt ceiling has added to investors' concerns by raising the possibility of a potentially disastrous U.S. debt default. Italy's 10-year bond yield was last up 4 bps at 4.355%. It rose to its highest since March 9, at 4.376%, earlier in the session.

The gap between German and Italian 10-year yields rose slightly to 186 bps. Minutes from the Federal Reserve's meeting earlier in May are due out after European markets close, and will be scrutinised by global investors for clues about the direction of rates.

ECB President Christine Lagarde is due to speak, also after European markets shut, at a celebration to mark the 25th anniversary of the euro zone's central bank.