Euro zone yields rise as expectations for US rates overshadow ECB remarks

Germany's two-year yield was last up 2 basis points at 2.98%, after hitting 3.001% in early trading, its highest level since November. "Today's ECB remarks do not change expectations for the (ECB) policy path," said Massimiliano Maxia, senior fixed income specialist at Allianz Global Investors, confirming forecasts for 75 bps of cuts in the next 10-12 months.

Euro zone government bond yields rose on Thursday as expectations for a higher-for-longer scenario for U.S. interest rates more than offset European Central Bank remarks suggesting an easing of its monetary policy may happen soon. The ECB held borrowing costs at a record high as expected and said it would remain data dependent.

The German two-year yield hit its highest level since late November and markets scaled back their bets on ECB rate cuts to 75 basis points in 2024, after U.S. data showed on Wednesday that inflation was stronger than expected in March. The U.S. 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.

Markets discounted just one Fed rate cut in 2024 in September after Wednesday's data, according to implied yields of futures of CME federal funds. Some analysts expect a less dovish stance by the Fed to lead to less easing in the euro area.

"While we continue to believe that the ECB will be the first central bank to start cutting rates this year, the path beyond that will remain dictated by Fed action," said Max Stainton, senior global macro strategist at Fidelity International. Germany's two-year yield was last up 2 basis points at 2.98%, after hitting 3.001% in early trading, its highest level since November.

"Today's ECB remarks do not change expectations for the (ECB) policy path," said Massimiliano Maxia, senior fixed income specialist at Allianz Global Investors, confirming forecasts for 75 bps of cuts in the next 10-12 months. "An ECB more dovish than the Fed would weaken the euro... however I think the ECB will be able to cut rates in June even if the Fed should be expected to wait to take action," Maxia said.

Markets on Thursday were pricing in around 75 basis points of ECB cuts this year, and an about 80% chance of a first move by June. "Inflation is falling, but not services. The ECB hopes that services do not begin to behave like the U.S., where services inflation rose yesterday," said Nick Chatters, fixed income investment manager at Aegon Asset Management.

The German 10-year bond yield rose 5 bps to 2.48%, after rising 6 bps on Wednesday. Italian bonds underperformed their peers, as a more hawkish policy stance would hurt the euro area's most indebted countries. Italy's 10-year yield was up 10 bps at 3.87%. Bond yields move inversely to prices.

The closely watched gap between Italian and German 10-year borrowing costs stood at 135 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.

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