Euro zone bond yields jump after Fed hike, ahead of ECB

Ahead of the decision, Germany's 10-year bond yield , the benchmark for the euro zone, was up 4 bps at 2.484%. "Today, the market is not focused on the 25 bp rate hike… that's a done deal," said Piet Haines Christiansen, chief strategist for the ECB at Danske Bank.

Euro zone government bond yields rose sharply on Thursday after the Federal Reserve signalled more interest rate hikes are likely, and as traders waited for the European Central Bank's decision later in the day.

Short-dated yields, which are particularly sensitive to changes in interest rate expectations, rose to their highest levels since the banking turmoil of mid-March. Germany's 2-year yield jumped to 3.134% in early European trading, the highest since March 10. It was last up 6 basis points (bps) at 3.106%.

The Fed on Wednesday left interest rates on hold at the 5% to 5.25% range, but its projections showed that borrowing costs could still rise by as much as half a percentage point by the end of the year. U.S. bond yields jumped after the Fed's announcement, with the 2-year yield hitting 4.803%, also the highest since March 10. Yields move inversely to prices.

"The Fed is putting more weight on the strong jobs data and sticky core inflation than the slowing headline inflation numbers," said Seema Shah, chief global strategist at Principal Asset Management, in emailed comments. The European Central Bank will set interest rates at 2:15 p.m. CET (1215 GMT). Investors think it almost certain that ECB officials will raise interest rates by 25 bps, from the current level of 3.25%.

They then broadly expect another 25 bp increase in July, taking rates to a peak of 3.75%, according to pricing in derivatives markets. Ahead of the decision, Germany's 10-year bond yield , the benchmark for the euro zone, was up 4 bps at 2.484%.

"Today, the market is not focused on the 25 bp rate hike… that's a done deal," said Piet Haines Christiansen, chief strategist for the ECB at Danske Bank. "So focus turns to the communication and the forward guidance, and the staff projections."

The ECB will release economic projections that show where the central bank expects inflation is heading. If those projections are revised up, investors typically expect more rate hikes, and vice versa. Italy's 10-year yield was up 5 bps at 4.145%. The closely watched gap between Italian and German 10-year borrowing costs was around 164 bps, just above a 14-month low, in a sign of investor confidence in Italy.

Investors will also listen very closely to President Christine Lagarde's press conference. "I think that she will say that further tightening is needed, but I think she'll say it will be on a meeting-by-meeting basis," Haines Christiansen said.

He expects rates to rise to 4% - meaning three more 25 bp rate hikes by September. Elsewhere, data on Thursday showed China's economy struggled in May, with industrial output and retail sales missing forecasts.

China's central bank has already cut some interest rates, and investors expect more to come.