German bond yield hits four-month high as traders await ECB

But traders will be on the lookout for whether ECB President Christine Lagarde still thinks a June cut is likely, as she and other officials have previously suggested. Germany's two-year bond yield, which is sensitive to ECB rate expectations, hit 3.001% in early trading after rising 7 basis points (bps) in reaction to the U.S. data on Wednesday.

The German two-year bond yield hit its highest level since late November on Thursday after U.S. inflation data for March came in stronger than expected the previous day, putting the spotlight on the European Central Bank's reaction. The ECB is almost certain to leave rates at a record high of 4% when it announces its latest decision at 1215 GMT (1415 CET). But traders will be on the lookout for whether ECB President Christine Lagarde still thinks a June cut is likely, as she and other officials have previously suggested.

Germany's two-year bond yield, which is sensitive to ECB rate expectations, hit 3.001% in early trading after rising 7 basis points (bps) in reaction to the U.S. data on Wednesday. It was last up 3 bps at 2.983%. Yields move inversely to prices. The U.S. consumer price index rose 0.4% in March after climbing the same amount in February, defying economists' expectations it would ease to 0.3%. Year-on-year, inflation accelerated to 3.5% from 3.2% the previous month.

The figures cast doubts on whether the Federal Reserve will be able to cut rates this summer, and made investors temper their expectations for rate cuts from other central banks, given the importance of the U.S. to the global economy. Reinout De Bock, head of European rates strategy at UBS, said he still expected the ECB to lower borrowing costs in June and deliver 75 basis points of cuts this year, with a potential for 100 bps.

"I think we're still there," he said. "In terms of communication, Lagarde will probably reiterate what she said at the ECB Watchers conference, that she has a high conviction on June but doesn't want to commit beyond that." Markets on Thursday were pricing in 75 basis points of ECB cuts this year, down from around 87 bps before the U.S. data and 100 bps in the middle of March.

Germany's 10-year bond yield was up 3 bps at 2.459%, after rising 6 bps on Wednesday. The Italian 10-year bond yield was 4 bps higher at 3.812%.

The closely watched gap between Italian and German 10-year borrowing costs stood at 134 bps. It reached 145 bps early this month, its highest level since early March, after hitting 115 in mid-March, its lowest in over 24 months. Although U.S. inflation has remained stubborn, euro zone price growth slowed down more than expected to 2.4% year-on-year in March, close to the ECB's 2% target.

The fall in inflation means investors still think an ECB June rate cut is likely, even though they now expect the Fed to wait with its move until September.

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