Euro zone bond yields tick up, inflation data in focus

Euro zone bond yields rose on Thursday after flash inflation data from Germany’s most populous state ticked up, though Spanish headline inflation fell below the European Central Bank's 2% target for the first time in over two years. Germany's 10 year bond yield, the benchmark for the currency bloc, was 4.5 basis points (bps) higher at 2.36%, while the two-year yield was up 4 bps at 3.21%.

Euro zone bond yields rose on Thursday after flash inflation data from Germany's most populous state ticked up, though Spanish headline inflation fell below the European Central Bank's 2% target for the first time in over two years.

Germany's 10 year bond yield, the benchmark for the currency bloc, was 4.5 basis points (bps) higher at 2.36%, while the two-year yield was up 4 bps at 3.21%. The German state of Nordrhein-Westfalen reported an uptick in inflation in June on both a month-on-month and year-on-year basis, throwing some cold water on hopes that data released on Wednesday showing slowing inflation in Italy would be mirrored across Europe.

More German flash inflation figures are due throughout the day. They are expected to come in higher, said analysts at DZ bank in a note, because of the comparison with June 2022 when Germany brought in extraordinary measures to cap costs on transport and fuel. There was better news from Spain for policymakers in their fight against price rises, as data there showed consumer prices rose 1.9% year-on-year in June, their slowest increase since March 2021

"Inflation remains the central banks' one needle in the compass that dictates their policy nowadays. This puts the focus squarely on today's inflation readings out of Germany and Spain," said ING analysts in a note. "Alongside Italy's data from yesterday this should already give a good idea of where tomorrow's eurozone reading is headed – and it should signal no let up in the pressure on central banks to continue to act forcefully." Euro zone flash inflation data is due on Friday, along with a gauge of U.S. inflation, the personal consumption expenditure data.

An aggressive series of rate hikes from central bankers in Europe and around the world weighed heavily on government bond prices last year and in early 2023, and top U.S. and European policymakers held firmly to their hawkish tone at a closely watched central banking conference earlier this week. The ECB is still not seeing enough evidence that underlying inflation has turned a corner and is on a downward path, ECB President Christine Lagarde said on Wednesday.

Italy's 10-year bond yield rose 4.5 bps to 4.02% and its two year yield rose a similar amount to 3.81%.