Euro zone yields tick up after inflation, growth data

"The key point from the data is the ECB can cut in June - the bar not to is very high - the question is do they then cut in July," said Andrzej Szczepaniak, senior European economist at Nomura. Government bonds remain highly sensitive to changes in expectations for central bank interest rates.

Euro zone government bond yields ticked higher on Tuesday after data showed inflation in the bloc steadied in March and the economy rebounded in the first quarter, not disrupting market bets on a June rate cut, but leaving the future path open. The German 10-year bond yield, the benchmark for the euro zone bloc, was up nearly 4 basis points at 2.56%.

It hit a five-month high of 2.65% last Thursday, but has since been falling, helped somewhat by initial inflation data from Germany and Spain on Monday. In the euro zone,

inflation steadied at 2.4% in April , Tuesday flash data showed. An important indicator of underlying price pressures slowed, though closely watched services inflation was 3.7%, a decline, but possibly still too high for comfort.

Meanwhile, gross domestic product in the 20-country bloc increased by an above-expectations 0.3% quarter-on-quarter. "The key point from the data is the ECB can cut in June - the bar not to is very high - the question is do they then cut in July," said Andrzej Szczepaniak, senior European economist at Nomura.

Government bonds remain highly sensitive to changes in expectations for central bank interest rates. Market pricing currently indicates a roughly 70% chance of a 25-basis-point European Central Bank cut in June, and two or three cuts in total this year. Investors will also be watching the Federal Reserve, which begins its two-day meeting on Tuesday - no rate change is expected but chair Jerome Powell's Wednesday post-meeting press conference will be watched closely given sticky U.S. inflation and strong growth.

Important U.S jobs data is due on Friday. "The new narrative is what happens if we see what we're now seeing in the U.S. in the euro zone in a few months' time. Growth is expected to pick up and should services inflationary pressure remain sticky for longer, that causes problems for the ECB even if they begin cutting in June," said Szczepaniak.

Italy's 10-year yield was higher by 3.2 bps​ at 3.85%, and the gap between Italian and German bunds widened 1 bp to 128 bps. Germany's two-year bond yield, which is more sensitive to European Central Bank rate expectations, was up 3 bps at 2.99%.

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