LONDON: Germany's benchmark 10-year Bund yield rose to a two-week high on Thursday as minutes from the Federal Reserve's last meeting rekindled talk that U.S. interest rates would rise next month.
Fed officials felt the U.S. economy could be ready for another rate increase in June, according to the minutes from the April meeting released on Wednesday that took markets by surprise.
The minutes followed hawkish comments from Fed policymakers earlier this week. In addition, data this week showed that U.S. inflation rose at the fastest pace in more than three years in April and factory orders numbers were revised higher.
Fed fund futures put the probability of a June rate hike by the Fed at 34 percent, compared with 19 percent before the Fed minutes were released, 15 percent on Tuesday, and less than 1 percent a month ago, according to CME group's FedWatch.
"Rate hike expectations are rising, but I think the jury is still out on a June move," said Commerzbank strategist Rainer Guntermann.
"On the one hand, high-profile data such as the next payrolls numbers could boost expectations for a hike, but on the other hand, uncertainty in the world or weaker data could delay (it)," he said.
Short-dated U.S. Treasury yields climbed to their highest in two months on Wednesday, setting the tone for European markets.
Germany's 10-year bond yield rose as much as 4 basis points to a two-week high at about 0.20 percent, before pulling back a touch. Other euro zone bond yields were 2-5 bps higher.
Analysts said a fall in oil prices and concern about an EgyptAir plane that went missing en route from Paris to Cairo may be lending the safe-haven German market some support.
Cyril Regnat, fixed income strategist at Natixis, said that even with a selloff in U.S. bond markets, European bonds were likely to show resilience before risk events such as next month's British referendum on European Union membership.
"The outcome of the referendum is still highly uncertain and until that's out of the way we won't see a clear trend in the European bond market," he said.
The European Central Bank releases the minutes from its April meeting later in the day. They may shed more light on ECB plans to buy corporate bonds as part of its asset-purchase programme next month. They may also show whether criticism of its monetary policy is affecting plans for further easing.
Spain sold 2.5 billion euros of bonds due 2019, 2024 and 2030 on Thursday. France sold about 6.2 billion euros of medium-term bonds.
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