German bond yields hit one-month high as rate-cut optimism wanes

Germany's 10-year bond yield, the benchmark for the euro zone, rose to a one-month high on Wednesday after central bankers pushed back against market expectations of rapid interest rate cuts this year.

Germany's 10-year bond yield, the benchmark for the euro zone, rose to a one-month high on Wednesday after central bankers pushed back against market expectations of rapid interest rate cuts this year. The 10-year yield, which moves inversely to the price, hit 2.273% in early European trading, the highest since Dec. 11. It was last up 4 basis points (bps) at 2.253%.

"Regarding today's market moves, I think it's general central bank talk, pushing back expectations on near-term rate cuts, and also UK inflation figures," said Jussi Hiljanen, head of European rates strategy at lender SEB. British inflation unexpectedly picked up in December to an annual rate of 4%, up from 3.9% in November, data on Wednesday showed.

British government bond yields jumped by around 10 bps as investors wound in some of their bets on the amount of Bank of England easing this year. Central bankers have been using the World Economic Forum in Davos, Switzerland, to try to temper exuberance about rate cuts.

Dutch central bank chief Klaas Knot on Wednesday said markets were getting ahead of themselves in pricing rapid falls in rates, speaking to CNBC at Davos. ECB President Christine Lagarde told Bloomberg there would likely be majority support among ECB officials for an interest rate cut in the summer, although she stressed they would be data-dependent.

Speaking in the United States on Tuesday, Federal Reserve official Christopher Waller sent Treasury yields rising on Tuesday when he said he saw "no reason to move as quickly or cut as rapidly as in the past". Italy's 10-year bond yield was up 4 bps at 3.863%. It has climbed around 20 bps this month, although remains well below October's highs after plunging in November and December.

Pricing in money markets showed investors became slightly less certain that the first ECB rate cut is coming in April, now seeing it as a roughly 95% chance. It was fully priced in on Tuesday. Investors now anticipate 140 bps of cuts this year in the euro zone, down from around 150 bps early on Tuesday and around 170 bps at the start of January.

Germany's 2-year bond yield, which is sensitive to rate cut expectations, rose 6 bps to 2.652%, just below a one-month high. Hiljanen said that, among ECB officials, "it seems like the consensus is holding to a possibility of the first rate cut coming in June this year".

The closely watched gap between Italian and German 10-year yields was steady at 160 bps, well below recent highs.