German 2-year bond yield hits one-month high after U.S. data

U.S. retail sales increased more than expected in December as consumers stepped up purchases of motor vehicles and retailers offered discounts. Germany's 10-year yield, the benchmark for the euro area, was up 5.5 basis points (bps) at 2.27%.

Euro zone borrowing costs increased on Wednesday, with the German 2-year yield hitting a one-month high, after data showed U.S. retail sales rose, keeping the economy on solid ground.

Strong economic data weaken expectations for quick policy rate cuts from the Federal Reserve. U.S. retail sales increased more than expected in December as consumers stepped up purchases of motor vehicles and retailers offered discounts.

Germany's 10-year yield, the benchmark for the euro area, was up 5.5 basis points (bps) at 2.27%. It was up 4 bps at 2.25% before the U.S. data. It rose recently as several European Central Bank (ECB) officials pushed back against market expectations for early rate cuts, with Bank of France governor Francois Villeroy de Galhau – seen as reliable in providing guidance for the policy path – stating that the ECB should be patient.

Villeroy is perceived as a centrist between hawks and doves. Market participants label as hawks central bank officials who are inclined to advocate a tight monetary policy to control inflation, while doves are more focused on economic growth and the labour market.

Money markets are pricing in 135 bps of ECB rate cuts in 2024 from around 140 before the U.S. data and 145 bps late on Tuesday. Germany's two-year bond yield, sensitive to expectations for policy rates, reached its highest level since Dec. 13 at 2.68% after the U.S. figures. It was last at 2.66%, up 7.5 bps.

Italy's 10-year bond yield, the benchmark for the euro area periphery, was up 7 bps to 3.89%.