Euro zone yields rise after Powell says more hikes possible

"The speech is very balanced but clearly points to the risk of doing more rather than doing nothing at all," said Rohan Khanna, head of euro rates strategy at Barclays. "So, the fixed income sell-off reflects that." While yields rose on Friday, German 10-year yields were still set to close the week lower after sharp rises earlier in August driven by strength in the U.S. economy raising Treasury yields. Focus turns to European Central Bank chief Christine Lagarde's speech at 1900 GMT.

Euro zone yields rose on Friday after Federal Reserve Chair Jerome Powell told the Jackson Hole symposium that the world's biggest central bank may need to raise interest rates further. In comments that balanced slowing inflation with the surprising overperformance of the U.S. economy, Powell said policymakers would "proceed carefully as we decide whether to tighten further." But he also made clear that the Fed has not yet concluded its benchmark rate is high enough to be sure inflation returns to its 2% target.

The U.S. central bank chief added it was difficult to know with precision the degree to which the Fed's current 5.25% to 5.5% benchmark interest rate had cleared the "neutral" rate of interest needed to slow the economy. Government bond yields rose globally following the speech. In the euro zone, Germany's two-year yield, sensitive to interest rate expectations, was up 7 basis points to 3.74% by 1504 GMT.

The 10-year yield, the benchmark for the euro zone, was up 5 bps to 2.57%. "The speech is very balanced but clearly points to the risk of doing more rather than doing nothing at all," said Rohan Khanna, head of euro rates strategy at Barclays.

"So, the fixed income sell-off reflects that." While yields rose on Friday, German 10-year yields were still set to close the week lower after sharp rises earlier in August driven by strength in the U.S. economy raising Treasury yields.

Focus turns to European Central Bank chief Christine Lagarde's speech at 1900 GMT. Investors have been more divided about the ECB's next move than the Fed's.

A deeper-than-expected contraction in business activity this week drove traders to bet the ECB was more likely to pause, keeping its deposit rate at 3.75%, than deliver another 25 basis point hike at its September meeting -- expectations they continued to hold onto on Friday. And ECB policymakers are increasingly concerned about deteriorating growth prospects and, while the debate is still open, momentum for a pause in its rate hikes is building, eight sources with direct knowledge of the discussion told Reuters.

Policymakers appear divided. German central bank President Joachim Nagel, a hawk, said monetary policy needs to be more stubborn than price growth. His Portuguse counterpart Mario Centeno, seen as a dove, said the bank should be cautious in September with downside risks to the economy having materialised. Commerzbank's head of rates research Christoph Rieger argued the ECB could steal the stage at Jackson Hole, recalling that former ECB chief Mario Draghi used the conference in Wyoming nine years ago to open the door to quantitative easing measures while last year board member Isabel Schnabel prepared the ground for significant interest rate hikes.

"Lagarde could provide more dovish pointers than Powell," Rieger said. Data confirmed on Friday that Germany, Europe's largest economy, stagnated in the second quarter compared with the previous three months, although a resilient labour market, strong wage increases and declining inflation should boost private consumption.

Separate data showed German business morale deteriorated further in August.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)