Euro zone bond yields edge higher after strong PMI data

By Stefano Rebaudo April 21 (Reuters) - Euro zone government bond yields edged higher after economic data showing solid business activity nudged up expectations for the European Central Bank's hiking path. Surveys indicated the euro zone's economic recovery unexpectedly gathered pace this month. French business activity grew more than forecast in April, while Germany saw a third straight month of expansion. Germany's 10-year yield , the bloc's benchmark, rose 2.5 basis points (bps) to 2.469% and was on track to end the week up 4 bps after a jumping by 25 bps the week before. Volatility has dropped, and bond prices have been range-bound this week. The November 2023 ECB euro short-term rate (ESTR) was at 3.75%, implying expectations for the deposit facility rate to peak at 3.85% by year-end. The ECB is unlikely to return to providing guidance on its next policy moves given the uncertainty in the outlook, ECB Vice President Luis de Guindos said on Friday. Analysts said economic data would be crucial while markets await the Federal Reserve and the European Central Bank policy meetings in the next couple of weeks. They were also assessing inflation developments ahead of key data right before the ECB policy meeting, due in early May. "Core inflation is likely to remain at a momentum that will unnerve the ECB," said George Buckley, chief euro-area economist at Nomura. "However, expectations data for February continued to be weak, suggesting there may be weaker second-round effects, posing downside risks to our forecasts," he added, mentioning the European Commission survey quoting service sector three-month price expectations. A market gauge of long-term inflation expectations dropped to 2.43% on Thursday after hitting its highest level since March 7 at around 2.5% on Tuesday. Italy's 10-year government bond yield rose 4.5 bps to 4.36%, with the spread between Italian and German 10-year yields -- a gauge of investor confidence in the more indebted countries of the euro zone – at 186 bps. Analysts said an S&P rating review, due later on Friday, should be broadly neutral for BTPs, as they expected no change. The gap between French and German 10-year bond yields have been relatively stable recently despite protests against President Emmanuel Macron's reform plan.

It was at 50 bps on Friday after briefly peaking above 60 bps in mid-March. Last weekend, Macron signed the rise in the retirement age into law after three months of protests that brought huge crowds onto the streets and, at times, turned violent.
(Reporting by Stefano Rebaudo, editing by Christina Fincher)