Then on Thursday, data showed U.S. producer inflation was higher than expected in January, further bolstering expectations that the Federal Reserve will push up borrowing costs further. Germany's 2-year yield , which is sensitive to changes in policy rate expectations, was last up 2 basis points (bps) to 2.891%, a 14-year high. Yields move inversely to prices.
"This current sell-off is expected in my view, because the January rally was a bit overdone," said Evelyne Gomez-Liechti, multi-asset strategist at Mizuho. "The market is just readjusting to this new macro data." Italy's 2-year yield rose to its highest since August 2012 at 3.465%, up 6 bps on the day. "Lagarde once again affirmed a 50 bp rate hike in March," said Jens Peter Sørensen, chief analyst at Danske Bank. "Given earlier comments from other ECB officials, it supports the view that ECB is not done hiking after the March meeting given the current inflationary pressure."
The ECB has promised a 50 bp increase at next month's meeting, which would take the deposit rate to 3%.
Traders' bets on where rates will end have soared to over 3.6%, while expectations of monetary policy easing through 2024 have eased. The picture is similar in the United States, where stubbornly high inflation and a strong payrolls report have pushed peak rate expectations for the Federal Reserve above 5.3%.
"We've seen quite a big move in the Fed terminal rate and a dramatic decline in rate cuts priced by the back end of the year and I think euro zone yields have been dragged along with that," said Lyn Graham-Taylor, senior rates strategist at Rabobank.
Germany's 10-year yield , seen as the benchmark for the euro area, reversed an earlier fall and was last up 4 bps at a more than one-month high of 2.514%.
The yield stood below 2% in January as falling energy prices boosted optimism that rate hikes might soon end. The ECB is expected to follow up March's expected 50 basis point move with a further quarter point hike next quarter. The vast majority of economists polled by Reuters said the risk is that it goes even higher.
Italy's 10-year yield was last up 7 bps at
4.396%, its highest since the start of January.
Expectations of higher interest rates normally cause
investors to demand a higher return on bonds, pushing yields up
and prices down, and vice versa.
($1 = 0.9347 euros)
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Traders raise peak rate bets Shorter euro bond yields ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
(Reporting by Samuel Indyk and Harry Robertson, additional
reporting by Stefano Rebaudo; Editing by Barbara Lewis, Emelia
Sithole-Matarise and Bernadette Baum)
