Germany's 10-year bond yield hits two-month high before ECB decision

Germany's 10-year bond yield rose to its highest level since early December on Thursday as investors waited for the European Central Bank's (ECB) interest rate decision later in the day.

Germany's 10-year bond yield rose to its highest level since early December on Thursday as investors waited for the European Central Bank's (ECB) interest rate decision later in the day. The ECB is almost certain to leave rates unchanged at 4% but market participants will be listening closely for hints about when borrowing costs might start falling.

Germany's 10-year yield, the benchmark for the euro zone, was last up 2 basis points (bps) at 2.352%, after earlier touching its highest since Dec. 4 at 2.371%. Yields move inversely to prices. U.S. bond yields rose sharply after European trading finished on Wednesday after a weak auction for a 5-year Treasury note.

"Ahead of the ECB and U.S. data releases I find it hard to read too much into the individual moves," said Benjamin Schroeder, rates strategist at ING. "But the euro 10-year yields seeing some pressure could be a catch up to the weak UST 5-year auction."

The ECB's decision comes at 1315 GMT (1415 CET) and will be followed by a press conference with President Christine Lagarde at 1345 GMT. "We expect Lagarde to indicate that it would be premature to talk about rate cuts and the first rate cut around summer would make sense," said Mohit Kumar, chief economist and strategist for Europe at Jefferies.

Data on Thursday showed that German business sentiment unexpectedly fell in January. The Ifo institute said its business climate index stood at 85.2, down from 86.3 in December. Italy's 10-year yield was up 4 bps to 3.934%, pushing the gap between German and Italian 10-year yields slightly wider to 156 bps.

The so-called spread traded at around its lowest in two years at 150 bps earlier this week. Investors are also looking towards U.S. data, with fourth-quarter gross domestic product and weekly jobless claims figures due later in the day.

Germany's 2-year bond yield, which is sensitive to interest rate expectations, was up 1 bp at 2.721%. On Thursday, investors saw a roughly 60% chance that the first 25 bp ECB rate cut will come in April. That was unchanged from the start of the week but down sharply from the start of the year when money markets were pricing a 64% chance of the first cut coming in March.