Euro zone bond yields climb, heading for third weekly rise

Germany's 10-year bond yield, the benchmark for the euro zone, was last up 2 basis points (bps) at 2.454%, putting it on track to rise 5 bps for the week. Sean Kou, rates strategist at Societe Generale, said the rise in yields was driven by an ongoing repricing of central bank rate-cut expectations given that economies are holding up better than anticipated.

German bond yields were on track for their third straight weekly increase on Friday as economic data and central bank officials continued to chip away at investors' hopes for rapid interest rate cuts this year. Germany's 10-year bond yield, the benchmark for the euro zone, was last up 2 basis points (bps) at 2.454%, putting it on track to rise 5 bps for the week.

Sean Kou, rates strategist at Societe Generale, said the rise in yields was driven by an ongoing repricing of central bank rate-cut expectations given that economies are holding up better than anticipated. "We're more in the soft landing scenario (for the euro zone economy), where rate cut pricing might disappoint going forwards," Kou said on Friday.

Investors on Friday were expecting around 90 bps of interest rate cuts from the European Central Bank this year, according to money market pricing. That's down from around 102 bps on Monday and more than 150 bps at the start of February. Data out on Friday showed that inflation expectations among euro zone consumers ticked up to 3.3% for the year ahead, from 3.2% previously. Separate figures showed German business sentiment brightened slightly despite the travails of Europe's largest economy.

ECB official Isabel Schnabel helped limit the rise in yields on Friday when she said inflation expectations look under control. Her colleague Joachim Nagel, meanwhile, said the ECB should resist the temptation to cut rates early. Germany's 2-year bond yield, which is sensitive to ECB rate expectations, was last up 3 bps at 2.936%, just below its highest level since late November.

Survey-based data on Thursday showed the downturn in euro zone business activity eased in February, hinting at signs of recovery, even as Germany's slump deepened. Overnight, Federal Reserve official Christopher Waller said policymakers should delay rate cuts by at least a couple of more months to see if a January uptick in inflation will abate.

Given the similar paths of American and euro zone inflation, as well as the overwhelming importance of the U.S. economy, the two bond markets tend to move together. U.S. yields were up by around 1 to 2 bps on Friday. ECB official Robert Holzmann said on Friday the central bank is unlikely to cut before the Fed because of the strong links between the two economies, Bloomberg reported.

Italy's 10-year bond yield was last up 2 bps at 3.935%. The closely watched gap between Italy and Germany's 10-year bonds remained subdued at 147 bps, around its lowest since early 2022.