Euro Zone Bond Yields Surge Amid Inflation Worries

Euro zone bond yields reached new six-month highs on Thursday as investors awaited inflation data. German and Italian yields saw significant increases, reflecting concerns over rising inflation and potential rate hikes. The ECB is expected to implement monetary easing in 2024, with money markets pricing in two rate cuts.

Euro zone benchmark Bund yields hit fresh six-month highs on Thursday with investors on hold ahead of the bloc’s inflation data due on Friday. On Wednesday, German Bund yield hit its highest in over six months and Italian BTPs reached 4% after German inflation rose slightly more than forecast and a Federal Reserve official didn’t rule out a rate hike.

Money markets on Thursday priced in 58 basis points of European Central Bank (ECB) monetary easing in 2024 , a figure which implies two rate cuts and a roughly 30% chance of a third move by year-end. Germany's 10-year yield, the bloc's benchmark, was up 0.5 bps at 2.68%, after hitting its highest since mid-November at 2.687%.

Italy's 10-year yield rose 1.5 bps to 4.015% after hitting a fresh one-month high at 4.029%. The yield gap between Italian and German bonds -- a gauge of the risk premium investors seek to hold bonds of the euro area's most indebted countries -- was at 132 bps.

Germany's 2-year government bond yield, more sensitive to policy rate expectations, was flat at 3.10%. The spread between U.S. and German 10-year yields - a gauge of expectations for monetary policy divergence between the Fed and the ECB – tightened by one bp to 191.5 bps.