Euro zone yields fall as U.S. data support expectations for Fed pause

"Investors assign greater downside than upside risks to what the ECB presents as their baseline - implicitly a terminal (rate) of 3.75% to 4%," said Sphia Salim, European interest rate strategist at Bank of America. Euro area yields rose earlier in the session after an ECB survey showed consumers raised their inflation expectations in March for the first time since the autumn.

Euro zone government bond yields slipped for a second day running on Thursday as data supported expectations for the Federal Reserve to pause its monetary policy tightening in June. The number of Americans filing new claims for

jobless benefits jumped last week to the highest level since late 2021, while

producer prices rebounded modestly.

"U.S. job data provided a weaker economic backdrop, propping up expectations for lower inflation and for the Fed to pause at its next policy meeting," said Massimiliano Maxia, senior fixed-income strategist at Allianz Global Investors. "The U.S. market is in the driver's seat," he added.

Consumer price index inflation in the United States came in at 4.9% on a year-on-year basis in April, data on Wednesday showed. Germany's 10-year bond yield fell 11 basis points to 2.18%.

Italy's 10-year yield was last down 12 basis points at 4.09%. The closely watched gap between German and Italian borrowing costs held steady at 189 basis points. The drop in euro zone yields happened despite Bloomberg reporting that some European Central Bank officials think interest rate hikes might be needed as far out as September and that rates could rise to 4%.

"Everyone thinks that once the Fed is done," the ECB will follow, said Pooja Kumra, European rates strategist at TD Securities. Last week, the ECB raised rates by 25 basis points to 3.25%, a slowdown in the pace of increases.

The German two-year yield, which is more sensitive to policy rate expectations, was down 8 basis points to 2.54% after falling 4 basis points on the previous day. Joachim Nagel, an ECB policymaker and German central bank chief, told Bloomberg on Thursday that the "story about hiking rates is not over".

Yet on Wednesday, ECB policymaker Mario Centeno said the central bank is approaching the end of the rate-hiking cycle, remarks that Pablo Hernandez de Cos reiterated on Thursday. "Investors assign greater downside than upside risks to what the ECB presents as their baseline - implicitly a terminal (rate) of 3.75% to 4%," said Sphia Salim, European interest rate strategist at Bank of America.

Euro area yields rose earlier in the session after an ECB survey showed consumers raised their inflation expectations in March for the first time since the autumn. The Bank of England raised rates as expected on Thursday and said it no longer expected a recession, but anticipated that inflation would take longer to fall than it had hoped.

Ratings agency Fitch will update its credit rating on Italy on Friday, one of a number of risks coming up for Italian bonds.