Euro zone bond yields rise as U.S. retail sales weigh on Treasuries

"The cross currents within financial markets suggest that the data dependent Federal Reserve will need to carefully assimilate the implications of a still resilient consumer that has begun to take advantage of lower mortgage rates allowing for a pick-up in refinancing, in addition to continued overall spending during the holiday season," said Quincy Krosby, chief global strategist for LPL Financial. In late European trade, Germany's benchmark 10-year bond yield was up 3 basis points (bps) at 2.63% - having touched a two-month low earlier in the session at around 2.57%.

Government bond yields across the euro area rose from around two-month lows on Wednesday, dragged higher by U.S. Treasury yields as better-than-expected retail sales numbers highlighted the resilience of the U.S. economy. The German government froze major spending pledges focused on green initiatives and industry support after a constitutional court ruling on unused pandemic emergency funds blew a 60 billion euro ($65 billion) hole in its finances.

That news had little immediate impact on bond markets, fixated for now on the direction of interest rates in the United States and Europe. U.S. retail sales slipped 0.1% last month, against economist expectations for a 0.3% fall. Data for September was revised higher to show sales increasing 0.9%.

Euro zone bond yields, which had been lower for much of the session, headed higher after the data with U.S. Treasury yields rising sharply across the board . "The cross currents within financial markets suggest that the data dependent Federal Reserve will need to carefully assimilate the implications of a still resilient consumer that has begun to take advantage of lower mortgage rates allowing for a pick-up in refinancing, in addition to continued overall spending during the holiday season," said Quincy Krosby, chief global strategist for LPL Financial.

In late European trade, Germany's benchmark 10-year bond yield was up 3 basis points (bps) at 2.63% - having touched a two-month low earlier in the session at around 2.57%. Most other 10-year bond yields were up 2-3 bps on the day .

They had fallen sharply on Thursday after cooler-than-forecast U.S. inflation data reinforced expectations the Federal Reserve was finished with rate hikes. "Our view is that the steepening of global curves from mid- September to late October was due to uncertainty and the difficulty, after crucial central bank meetings, in working out whether we are at a policy peak or simply a pause," said Richard McGuire, head of rates strategy at Rabobank.

"The soft CPI data was very significant in terms of determining the way forward, and hence the sizable reaction." In September and October, longer dated bond yields rose much more sharply than shorter dated ones, causing yield curves to steepen, or, in current circumstances, become less inverted.

Investors also digested data showing a broad decline in euro zone industrial production in September, European Commission estimates the euro zone economy will grow more slowly this year than previously expected, and cooler-than-anticipated British inflation numbers.