Euro zone bond yields rise after Bank of Canada hikes rates

Euro zone bond yields rose on Wednesday after the Bank of Canada (BoC) raised interest rates for the first time in months, and European Central Bank officials stressed the threat from inflation.

Euro zone bond yields rose on Wednesday after the Bank of Canada (BoC) raised interest rates for the first time in months, and European Central Bank officials stressed the threat from inflation. The move by the Canadian central bank

lifted its key overnight benchmark interest rate by 25 basis points (bps) to a 22-year high of 4.75%. The BoC had been on hold since January.

The hike pushed up Germany's 10-year bond yield , which had been roughly flat. It was last up 7 bps at 2.445%. It was "a reminder to markets that the hiking cycle is not over yet," said Pooja Kumra, European rates strategist at TD Securities.

Shorter-dated bond yields, which are more sensitive to central bank interest rate expectations, rose more sharply. Germany's 2-year yield was last trading 9 bps higher at 2.983%. Investors were also listening closely to speeches from European Central Bank (ECB) officials ahead of the central bank's policy decision next Thursday.

"Given the high uncertainty about the persistence of inflation, the costs of doing too little continue to be greater than the costs of doing too much," Isabel Schnabel, a member of the ECB's executive board, told a Belgian newspaper on Wednesday.

Schnabel is often seen as one of the hawks on the rate-setting council. The ECB has raised rates by a combined 375 basis points in the past year in its effort to tame inflation, causing a significant sell-off in government bonds.

Current market expectations, which have remained largely unchanged in recent weeks, are for the ECB to raise rates by a further 50 basis points, split over its next two meetings. Italy's 10-year yield was 8 bps higher at 4.257% on Wednesday. That caused the gap between 10-year Italian and German borrowing costs to widen slightly to 179 bps.

Dutch central bank chief and governing council member Klaas Knot said on Wednesday that the ECB should be ready to raise rates further after its July meeting if inflation stays too high. On Tuesday, he said underlying inflationary pressures would prove difficult to bring down but added there were some signs that monetary tightening was having an effect.

Figures released on Tuesday showed euro zone consumers have lowered their inflation expectations significantly, though policymakers are not claiming victory in their fight against inflation yet.