By Harry Robertson
LONDON, April 11 (Reuters) – Euro zone bond yields rose sharply on Tuesday as European markets reopened after Easter, tracking a rise in U.S. Treasury yields on Friday and Monday after data showed jobs creation remained strong in March.
Germany’s 2-year yield DE2YT=RR, which is highly sensitive to changes in interest rate expectations, was last up 10 basis points (bps) at 2.645%.
The German 10-year yield DE10YT=RR climbed 7 bps to 2.252% in early European trading. Yields move inversely to prices.
“This is in reaction to the U.S. Treasuries selling off over the long Easter weekend, especially after the U.S. jobs report showing still decent job creation,” said Antoine Bouvet, senior rates strategist at ING.
Data on Friday showed that U.S. employers maintained a strong pace of hiring in March, while the unemployment rate slipped to 3.5%.
While European markets were closed over the Easter weekend, traders increased their bets that the U.S. Federal Reserve would raise interest rates once more, helping push up U.S. bond yields.
Expectations for further rate hikes dropped to effectively zero after the collapse of Silicon Valley Bank in March, causing bond yields to tumble as investors braced for further financial turbulence.
Yet bond yields in the United States and Europe have risen sharply since hitting multi-month lows in March, as central bankers and traders have turned their focus back to inflation.
The U.S. 2-year Treasury yield US2YT=RR rose 15 bps on Friday and 4 bps on Monday, and was down 1 bp to 3.997% on Tuesday.
ING’s Bouvet also said survey data from the New York Fed, which showed consumers are bracing for higher inflation over the next few years, could have added to the upward pressure on yields.
Italy’s 10-year yield IT10YT=RR rose 10 bps to 4.12% on Tuesday. That pushed the closely watched spread between German and Italian borrowing costs up slightly to 186 bps.
Traders now see a 70% chance that the Fed raises interest rates by 25 bps in May, a move that would add to presure on the European Central Bank to also keep hiking FEDWATCH.
Market pricing on Tuesday showed that traders think there’s an 80% chance the ECB will hike by 25 bps in May and a 20% chance of 50 bps.
Investor focus will be on the United States on Wednesday, when the latest consumer price inflation data is due.
Economists polled by Reuters think headline year-on-year inflation likely slowed to 5.2% in March from 6% in February. But they think core inflation – which strips out volatile food and energy prices – rose to 5.6% from 5.5%.
“The U.S. CPI print could further solidify market pricing for a 25 bps rate hike for the May meeting,” said Pooja Kumra, rates strategist at TD Securities.
Job gains remain strong Job gains remain strong
(Reporting by Harry Robertson; Editing by Emelia Sithole-Matarise)
((harry.robertson@thomsonreuters.com;))
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