Euro zone bond yields rose on Wednesday after data showed U.S. inflation was stronger than expected in March, causing investors to rapidly reduce the number of rate cuts they expect from the Federal Reserve this year.
The U.S. consumer price index (CPI) rose 0.4% month-on-month in March, the same as in February and above expectations of a 0.3% increase. Year-on-year inflation rose to 3.5%, from 3.2% the previous month.
Bond yields, which move inversely to prices, jumped in the U.S. and Europe. Germany’s 10-year government bond yield , the euro area’s benchmark, was up 6 basis points (bps) at 2.432%, having stood at 2.35% just before the data landed. It hit a three-week high of 2.457% on Monday before slipping back.
The 10-year U.S. Treasury yield was up 14 bps at 4.501%, its highest since November, from 4.346% before the figures.
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“The rates (bond) market needs to seriously consider the likelihood of higher-for-longer (U.S. interest rates) at least lasting through the summer and potentially through the end of the year,” said Lindsay Rosner, head of multi-sector investing for Goldman Sachs Asset Management.
Traders moved to scrub out their bets on a Fed rate cut in June and now see September as the most likely start date.
Yields have risen this year as U.S. economic and inflation data has come in stronger than expected, causing investors to rein in their bets on deep interest rate cuts from the Fed.
Given the importance of the U.S. economy and the similar path of inflation across the two economic zones, euro zone bonds tend to track their U.S. peers.
In recent weeks, however, U.S. yields have risen more, reflecting the stronger economy there. That trend continued on Wednesday, with the sharp rise in U.S. yields pushing the gap between the 10-year Treasury and German rates to the highest since late 2019 at 214 bps.
Traders were also focused on the European Central Bank, which is widely expected to keep rates unchanged at its policy meeting on Thursday. They will look for any hints about the speed of future rate cuts after an expected first move in June.
Money markets are currently pricing in 76 bps of ECB rate cuts in 2024, down from 87 bps before the U.S. data. Pricing has fallen from 95 bps at the end of March.
Italy’s 10-year yield, the benchmark for the euro zone periphery, was 7 bps higher at 3.784%.
The spread between Italian and German 10-year yields – a gauge of risk premium investors ask to hold bonds of the euro area’s most indebted countries – was little changed at 134 bps.
It reached 144.5 bps early this month, its highest level since early March, after hitting 115.4 in mid-March, its lowest in over 24 months.
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