Yields, which move inversely to prices, have surged over the last six weeks as stronger-than-expected economic and inflation data has caused investors to rapidly raise their expectations of where the European Central Bank's main interest rate will peak. Germany's 2-year government bond yield , the most sensitive to changes in interest rate expectations, rose by as much as 9 basis points earlier in the day to its highest since October 2008 at 3.215%. It was last up 7 bps at 3.198%. The yield on Germany's 10-year bond , seen as the benchmark borrowing cost for the single-currency area, hit its highest since July 2011 at 2.724% on Wednesday. It was last 8 bps higher at 2.71%.
Regional inflation data from Germany showed prices in North-Rhine Westphalia, the most populous region, rose 8.5% year-on-year in February, up from 8.3% in January. The inflation rate in Bavaria stayed at 8.8% in February, the same as in January. But it rose to 8.7% in Baden-Wurttemberg, from 8.5% the previous month.
German nationwide inflation, harmonised to compare with other European Union countries, rose more than expected in February, signalling that there has been no respite to cost pressures. "The main driver (of yields) has really been the regional German inflation prints that have come out," said Mohammed Kazmi, portfolio manager at Swiss bank UBP. "It does suggest we could see an upside surprise in the German inflation data this afternoon." Yields also rose sharply on Tuesday after data showed inflation was higher than expected in France and Spain in February. A market-based gauge of long-term euro zone interest rate expectations rose to 2.52%, its highest level since Refinitiv data records began in 2013. Meanwhile, Italian 2-year government bond yields hit their highest since August 2012 at 3.80%. The two-year yield was last up 13 bps at 3.798%. Markets are now predicting a peak in ECB rates of around 3.9% by December, according to pricing in futures markets .
A month ago, markets showed traders expected a peak of around 3.4% by September, with a small chance of a rate cut before the end of the year. Some are still sceptical. "For us this 3.9% level really does look like it's too much," said Joann Spadigam, rates strategist at NatWest Markets. She said NatWest Markets believed a peak rate of around 3.25% was more likely. The ECB has already raised rates to 2.5% from a record low of -0.5% in July. Expectations for higher interest rates push bond yields up and prices down, as they cause investors to demand higher returns on their investments. The Italian 10-year yield was last up 10 bps at 4.574%, having reached two-month highs. The rapid reconsideration of the likely path of ECB interest rates hammered bonds last month, with the yield on Germany's 2-year bond rising almost 50 bps. The German 10-year yield jumped 36 bps. "Markets are no longer trying to figure out how high can the Federal Reserve and the ECB go, but for how long should we discount higher rates," said Florian Ielpo, head of macro at Lombard Odier Asset Management. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Short-dated euro zone bond yields - 01/03 ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting by Harry Robertson; Editing by Barbara Lewis, Kim Coghill, Alex Richardson and Andrea Ricci)
