German bund yield slips from 2-1/2 month peak

"If it becomes increasingly clear that the Fed will wait for longer before rate cuts, it's realistic to think that most ECB governing council members will feel no need to hurry," Jussi Hiljanen, rates strategist at SEB, said. Germany's 10-year yield, the euro zone benchmark, was down 4 basis points (bps) at 2.35%, below Tuesday's peak of 2.415%, its highest level since Dec. 1.

Germany's 10-year bond yield slipped back on Wednesday from a 2-1/2 month high after hotter-than-forecast U.S. inflation data dampened expectations for spring rate cuts by the Federal Reserve. In the 12 months through January, the U.S. consumer price index increased 3.1%, above the 2.9% forecasts by economists polled by Reuters, prompting markets to trim expectations for rate cuts this year.

Analysts said that scaling back rate cut expectations in the U.S. would mean other central banks, including the European Central Bank, would be comfortable waiting to lower interest rates. "If it becomes increasingly clear that the Fed will wait for longer before rate cuts, it's realistic to think that most ECB governing council members will feel no need to hurry," Jussi Hiljanen, rates strategist at SEB, said.

Germany's 10-year yield, the euro zone benchmark, was down 4 basis points (bps) at 2.35%, below Tuesday's peak of 2.415%, its highest level since Dec. 1. The country's policy-sensitive two-year yield was down 2.5 bps at 2.746%.

The exact timing of rate cuts will depend on data, ECB chief economist Philip Lane told Spanish state television broadcaster TVE in an interview on Tuesday. ECB euro-short-term rate (ESTR) forwards imply around a 50% chance that the central bank cuts interest rates in April , with the first quarter-point cut not fully priced until the June meeting.

December 2024 forwards are pricing around 112 bps of easing this year, down from around 160 bps at the start of 2024. ECB Vice-President Luis de Guindos said on Wednesday that wage pressures remain high and there is not sufficient data yet to confirm they are starting to ease, giving the central bank time before interest rate cuts are discussed.

"The takeaway is pretty clear - central banks are pushing back on rate cut expectations," SEB's Hiljanen said. "In the euro area, they have been really trying to hammer through that they want to see first quarter wage negotiation agreements before considering cutting rates."

A new forecasting tool developed by the ECB showed wage growth was likely to peak early this year but the path further ahead remains uncertain. Euro zone economic growth was flat in the last three months of 2023, Eurostat said on Wednesday, confirming its preliminary estimate.

Meanwhile, British gilt yields fell after UK CPI unexpectedly held steady at an annual rate of 4% in January, defying forecasts for it to rise to 4.2%, official data showed. The 10-year gilt yield was last down 9 bps to 4.06%, which analysts said may be pressuring bond yields in the euro zone.

"For markets, it (UK CPI) might be having a marginal impact, but expectations for Fed rate cuts being postponed has a bigger impact on the ECB," Hiljanen added. Italy's 10-year bond yield the benchmark for the euro zone periphery, was down 7 bps at 3.87%, pushing the gap between Italian and German 10-year yields to around 151 bps.