German Bund yield hits near 11-week high after US data

Euro zone government bond yields rose on Tuesday, mirroring moves in the United States, after hotter than expected U.S. inflation data caused markets to reduce expectations of imminent central bank rate cuts.

Euro zone government bond yields rose on Tuesday, mirroring moves in the United States, after hotter than expected U.S. inflation data caused markets to reduce expectations of imminent central bank rate cuts. Germany's 10-year bond yield, the benchmark for the euro area, was last up around 2 basis points on the day at 2.39%, having touched 2.415%, its highest since Dec. 1, immediately after the data.

Germany's two year yield, which is sensitive to moves in interest rate expectations, was last up around 5 basis points on the day, at 2.77%, also hitting an 11-week high after the inflation report. U.S. Treasury yields jumped over 10 basis points.

The U.S. data showed the Consumer Price Index rose 0.3% on a monthly basis in January, above the 0.2% increase expected by economists polled by Reuters. On a year-on-year basis, it gained 3.1% versus the 2.9% estimated growth. Rises in the costs of shelter and healthcare were behind the change.

European rate expectations and government bonds have largely moved in line with their U.S. equivalents in recent months, despite economic growth data in Europe significantly underperforming that of the United States. Earlier on Tuesday the ZEW economic research institute said German investor morale improved more than expected in February though this was partly on hopes of interest rate cuts.

After the inflation data, market pricing shifted to reflect expectations the Federal Reserve will not cut rates until June. Markets had seen a May rate cut as more likely than not on Monday, and had nearly priced in a March rate cut at the start of 2024. Traders also reduced bets on European Central Bank monetary easing and are pricing around 110 basis points of cuts in 2024, around 10 basis points fewer than before the U.S. data, and roughly a 60% chance of an ECB rate cut as soon as April.

"It's a hotter-than-expected report and it's part of what the Fed has been alluding to when it says it's too early to say that inflation has been beaten," said Peter Cardillo, chief market economist at Spartan Capital Securities. "If this keeps up with another month or two of inflation staying high, you can kiss a June (rate cut) goodbye and we're probably looking at September."

The Italian government bond 10-year yield - the benchmark for the euro area's periphery - was up 3 basis points at 3.94%. The gap between Italian and German 10-year yields was at 154 basis points, wider on the day having been largely trending tighter in recent weeks. Bond prices of highly indebted countries had been benefitting from expectations of quick monetary easing and the ECB's gradual wind-down of the Pandemic Emergency Purchase Programme (PEPP) reinvestments announced in December.