Euro Zone Bonds Rise Amid Persistent Inflation Concerns

Euro zone bond yields increased as British data highlighted sticky services inflation, leading to cautious central bank stances on rate cuts. The German 10-year bond yield touched a three-week high. With ECB's June rate cut seen as certain, investors watch global inflation data and pay close attention to future monetary policy moves.

Euro zone bond yields rose on Wednesday after British data reminded investors of the stickiness of services inflation and reinforced expectations that central banks will be cautious when it comes to interest rate cuts. The German 10-year bond yield, the benchmark for the euro zone bloc, touched 2.556% in early trade, its highest in three weeks, and was last 2 basis points higher at 2.525%.

Eyes were on data out of Britain which showed consumer prices rose by an annual 2.3% last month, down sharply from a 3.2% increase in March, but above market expectations. British services inflation was sticky, inching down to 5.9% from 6.0% in March, leading markets to push back their expectations for the first Bank of England rate cut.

Markets see a rate cut by the European Central Bank in June as all but certain, but their path after that is unclear, meaning investors are paying close attention to both European inflation data as well as that from around the world. Market pricing currently indicates a further 25 bps ECB cut in the autumn and a chance of one more by year end.

"Persistence of services inflation is something we saw in Canada as well yesterday. An inflection point in monetary policy is coming but don't expect it to be an out and out easing cycle in G10," said Kenneth Broux, head of corporate research, FX and rates at Societe Generale. Canada's annual inflation rate slowed to a three-year low of 2.7% in April, though services prices rose 4.2% on an annual basis, Tuesday data showed, while the Reserve Bank of New Zealand, at its meeting earlier Wednesday, wrongfooted markets by warning that cuts were unlikely until far into 2025.

The U.S. Federal Reserve releases the minutes of its May 1 meeting later today, another piece of information from outside the bloc that euro zone rates investors will be watching. Within the euro zone, Germany's Bundesbank on Wednesday warned that wages in Germany have been rising faster than expected, casting some doubt on expectations for a continued fall in inflation.

Italy's 10-year yield was higher by 2 basis points at 3.823%, and the gap between Italian and German bunds was little changed at 129 bps. Germany's two-year bond yield, which is more sensitive to European Central Bank rate expectations, was 3 basis points higher at 3.004%.

Also notable for government bond investors, Japan's 10-year government bond yield rose to an 11-year high of 1% on Wednesday.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)