Euro zone yields rise as European downturn eases slightly

Data for Britain was brighter, with companies reporting a marginal return to growth in November after three months of contraction. "I think it's mostly the better-than-expected PMIs in Europe and the UK this morning which are driving yields higher," said Imogen Bachra, head of non-dollar rates strategy at Natwest Markets.

Euro zone bond yields rose on Thursday after economic data showed European economies were struggling in November but faring less badly than expected. The yield on Germany's 10-year bond, the benchmark for the bloc, was last up 3 basis points (bps) at 2.593%. Yields move inversely to prices.

Business activity in the euro zone contracted in November, according to purchasing managers' index (PMI) survey data released on Thursday, although the figures were slightly less bad than economists expected. Data for Britain was brighter, with companies reporting a marginal return to growth in November after three months of contraction.

"I think it's mostly the better-than-expected PMIs in Europe and the UK this morning which are driving yields higher," said Imogen Bachra, head of non-dollar rates strategy at Natwest Markets. Italy's 10-year bond yield was last 4 bps higher at 4.364%. The yield on France's 10-year bond was also up 4 bps at 3.163%.

British gilts were hit hardest, with the 10-year yield up 7 bps at 4.227%. U.S. markets were closed for Thanksgiving. PMI data from Germany showed that the euro zone's biggest economy fared better than expected in November, although activity still contracted.

"Judging by the PMI data, the risks to our near-term forecasts for economic activity in the euro zone and the UK are tilting less to the downside than before," said Holger Schmieding, chief economist at Berenberg in London. Yields on European and U.S. bonds have tumbled in recent weeks, after hitting multi-year highs in October. Data has suggested growth and inflation are cooling, making further central bank rate hikes unlikely in the eyes of investors.

Germany's 10-year yield, for example, has dropped from a 12-year high of 3.024% in early October. Italy's is down from 5.025% last month, an 11-year high. Germany's 2-year bond yield, which is sensitive to interest rate expectations, was last 2 bps higher at 3.031%. It has cooled from a 15-year high of 3.393% in July.

European Central Bank official and German central bank chief Joachim Nagel on Wednesday said economic data would determine if interest rates need to rise again. ECB official Isabel Schnabel is due to speak on Thursday evening. The ECB halted a streak of 10 straight hikes in October, leaving interest rates at a record high of 4%.

Traders on Thursday reckoned the ECB will cut rates by almost 90 bps by December 2024, according to pricing in derivatives markets, slightly less than expected at the start of the week.