On Tuesday, U.S. inflation data propped up borrowing costs on both sides of the Atlantic.
Germany's 10-year government bond yield , the benchmark for the euro zone, rose 2 basis points (bps) to a fresh six-week high of 2.47%. It hit its highest level since August 2011 in January at 2.569%. The German two-year yield hit its highest since October 2008 at 2.88%.
ECB's Gabriel Makhlouf said the bank could increase interest rates above 3.5% - from 2.5% currently - and likely would not cut them this year as it moves forcefully to bring inflation back to target.
"Even centrists at the ECB are unwavering in their determination to tighten policy," said Christian Schulz, deputy chief economist at Citi. "There continues to be no sign of a dovish pivot at the ECB, but if there is, relative centrists at the ECB would be key to watch," he added. Italy's 10 year yield, the benchmark for the euro zone periphery , jumped 10 bps to 4.33%, and the country's 2-year yield rose as much as 8.5 bps to its highest level since August 2012 at 3.427%. The closely watched spread between Italian and German 10-year yields widened 9 bps to 185 bps. A small amount of optimism on consumer price dynamics came from ECB policy dove Pablo Hernandez de Cos, who said that euro zone inflation could fall faster than earlier thought. "Terminal central bank policy rates keep repricing higher which is pushing up bond yields across the curve," said Kenneth Broux, senior strategist FX and rates at Societe Generale.
"Inflation is not cooling fast enough in the U.S. and the euro area, and while the UK was welcome this morning - i.e. core (inflation) lowest since June - it is still elevated and the labour market is tight," he added.
According to ECB euro short-term rate (ESTR) forwards, the ESTR will peak in September at 3.6%, implying expectations for a depo rate around 3.7%. The ESTR published by the ECB reflects the wholesale euro unsecured overnight borrowing costs of banks. It's usually around 10 bps below the deposit rate. Market pricing is now for U.S. rates to peak at 5.25% - from 4.5%-4.75% currently - and remain above 5% throughout this year. Data showed British consumer price inflation fell by more than expected to 10.1% year-on-year in January, and a measure excluding energy, food, alcohol and tobacco fell to 5.8% from December's 6.3%.
That helped British bonds to outperform peers, and the
10-year gilt yield dropped 7 bps to 3.46%, down from
Tuesday's over five-week high.
(Reporting by Alun John and Stefano Rebaudo; Editing by Mark
Potter)
