Analysts said the U.S. Federal Reserve would be more comfortable about ending its tightening cycle soon if unemployment was slightly higher. "U.S. labour market starts showing signs of weakness, but we still see 25 bps rate hike by the Fed in May as likely," said Massimiliano Maxia, a senior fixed-income strategist at Allianz Global Investors. "Euro area bonds are tracking U.S. Treasuries at the moment, but the ECB job to tame inflation is not done yet," he added. "Market focus is shifting to the central banks' monetary tightening and economic data as fears of a banking crisis seem to be in the rear-view mirror." Germany's 2-year bond yield , which is highly sensitive to changes in policy rate expectations, fell 2.5 basis points (bps) to 2.63% on Tuesday. "Structural forces will prevent the U.S. labour market from easing strongly, keeping the Fed’s concerns about taming inflation alive," said Florian Spate, senior bond strategist Generali Investments. Yields tumbled in March as cracks in the global banking system caused investors to rush to the safety of government bonds and dial back their expectations for how high central banks can raise interest rates. Yet yields - which move inversely to prices - have risen sharply from their March lows as the banking fears have receded and ECB officials have made clear more rate hikes are coming. "Given the clouded growth prospects associated with lingering concerns about a banking crisis and tightening lending standards, euro area government yields are skewed to the downside anyway," Generali Investments' Spate argued.
"This even applies if the ECB raises key rates further because of sticky euro area core inflation," he added. Investors are still analysing the potential impact of the announcement from the OPEC+ group of oil-producing countries that it would further slash oil production, which caused oil prices to spike on Monday.
Germany's 10-year yield , the benchmark for the euro zone, rose 2 bps to 2.26%.
That was well below the more than 11-year high of 2.77% seen in early March, but up considerably from a three-month low of 1.923% on March 20. Data showed that euro zone producer prices fell for a fifth straight month in February, while an ECB survey showed that consumers became more optimistic about a fall in inflation. Separate data showed that German exports rose significantly more than expected in February, by 4% on the previous month. Economists polled by Reuters were expecting a 1.6% rise. Italy's 10-year yield rose 3 bps to 4.12%, while the gap between Italian and German borrowing costs - seen as a gauge of confidence in the euro zone's more indebted countries - was at 185 bps. Traders expected the main ECB interest rate to peak at 3.55% in September, according to prices in derivatives markets.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Euro zone yields 04/04 ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting by Stefano Rebaudo and Harry Robertson; editing by Raissa Kasolowsky)
