Euro zone bond yields rise as markets await Bank of England

Euro zone bond yields rose for a second day on Thursday, retracing some of the recent fall spurred by weaker-than-expected U.S. data, as traders waited for the Bank of England's interest rate decision.

Euro zone bond yields rose for a second day on Thursday, retracing some of the recent fall spurred by weaker-than-expected U.S. data, as traders waited for the Bank of England's interest rate decision. Germany's 10-year bond yield, the benchmark for the euro zone bloc, rose 4 basis point to 2.5%. Yields move inversely to prices.

The German 10-year yield had fallen for four straight sessions until Wednesday, after nonfarm payrolls (NFP) data on Friday showed the U.S. jobs market slowed in April, boosting expectations that developed economy central banks will cut interest rates. "I do not think that today's sell-off is related to any specific events or news," said Emmanouil Karimalis, European rates strategist at UBS. "In my view, it is more of a correction, following the strong rally after the NFPs."

The Bank of England is widely expected to hold rates at 5.25% at 1100 GMT (1300 CET), but investors will be looking out for hints about whether borrowing costs are likely to fall in the coming months. Sweden's Riksbank cut rates on Wednesday in a sign that Europe's central banks are prepared to diverge from the U.S. Federal Reserve, which is expected to hold rates until September or November.

Traders expect the European Central Bank to lower rates in June, according to money market pricing, with inflation running at 2.4% in April and growth tepid. "The ECB looks ready to cut its policy rate in June, but uncertainty in the U.S. keeps (bond market) rates under pressure," said Karimalis.

Italy's 10-year yield was 6 bps higher at 3.855%, and the gap between Italian and German yields widened 2 bps to 135 bps. Germany's two-year bond yield, which is more sensitive to European Central Bank rate expectations, was up 2 bps at 2.95%.

On Wednesday, Austrian central bank Governor Robert Holzmann, who typically favours higher interest rates, said he sees "no reason...to cut key interest rates too quickly, too strongly". He added that the ECB would be influenced by the Fed, given the importance of the dollar in the global financial system.

Data on Thursday showed that China's exports and imports returned to growth in April after contracting in the previous month. In the first quarter, the United States overtook China as Germany's most important trading partner, according to Reuters' calculations.

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