Germany's 10-year-yield , the benchmark for the currency bloc, was at 2.13%, up 7 basis points (bps), following Thursday's 22.6 bp fall, the largest daily decline since 2011, according to Refinitiv data.
Italy's 10-year-yield, the benchmark for the periphery , was up 10.5 bps to 3.99% after its 40.5 bps Thursday fall, the most since March 2020's pandemic-induced market volatility. Yields move inversely to prices. The ECB raised rates by 50 bps on Thursday but, even though President Christine Lagarde explicitly signalled at least one more hike of the same magnitude next month, and reaffirmed the central bank would "stay the course" in the fight against high inflation, bonds rallied as investors reacted to hopes that rate increases were close to their end.
Last year's aggressive rate hikes by central banks around the world caused bond prices to fall sharply.
"The market is looking for all signs of weakening inflation and the end of the rate hiking cycle, said Jan von Gerich, chief analyst at Nordea.
"I don't think the reaction we saw yesterday was in line with what the ECB tried to communicate but that's the angle that the market is going for at the moment, and it can continue in the near term."
"Markets had the right view last year but I would say that there might be disappointment down the road when central banks can prove to be more hawkish than markets are betting at the moment."
Analysts at DZ bank said markets had reacted to a "more moderate tone" from Lagarde who said the inflation outlook was "more balanced" though they too said the ECB's president had been hawkish.
Lithuania's ECB governing council member Gediminas Šimkus and Slovakia's Peter Kazimir said on Friday rate hikes could continue after the March meeting.
The disconnect between market pricing and central bankers' remarks is also present in the United States, where markets are pricing in rate cuts this year despite Federal Reserve chair Jerome Powell saying he does not see this happening.
Friday's main global macro economic event is U.S. payrolls data, which are due at 1330 GMT. U.S. job growth likely remained strong in January but an anticipated further slowdown in wage gains should give the Federal Reserve some comfort in its fight against inflation.
Germany's 2-year yield , which is highly sensitive to interest rate expectations, rose 4 bps to 2.53% after Thursday's 17 bps tumble and Italy's two year yield, climbed 9 bps to 3.05% after Thursday's 33 bps drop. (Reporting by Alun John; Editing by Toby Chopra)
