Euro zone government bond yields steady at recent highs

It reached 2.599% in early trading, matching the previous day's five month high. European and U.S. yields have been gradually trending higher in April, and for much of this year, as economies appear more resilient than expected, and inflation, at least in the U.S., proves sticky, causing markets to push back expectations of central bank rate cuts.

Euro zone bond yields held steady near multi-month highs on Thursday after recent data suggested the European economy was picking up, and Spain's bonds traded largely in line with German peers after its prime minister suspended public duties. Germany's 10-year bond yield, the benchmark for the euro zone, was down a whisker at 2.58%. It reached 2.599% in early trading, matching the previous day's five month high.

European and U.S. yields have been gradually trending higher in April, and for much of this year, as economies appear more resilient than expected, and inflation, at least in the U.S., proves sticky, causing markets to push back expectations of central bank rate cuts. On Tuesday, a flash reading of the Purchasing Managers' Index (PMI) showed business activity in the euro zone expanded at its fastest pace in nearly a year in early April, as optimism remained strong and companies increased headcount.

The ECB has all but promised a rate cut in June, but its policymakers are still debating what happens after that. "In theory the ECB can start their cutting cycle before the Fed, but do I think they can do multiple cuts before the Fed starts? No. Sensitivity to the global currency markets will be problematic," said Nathan Thooft, chief investment officer, multi-asset solutions, at Manulife.

That means this week's data, important for watchers of the Federal Reserve, will continue to drive markets around the world. U.S. GDP data for the first quarter was due at 0830 ET (1230 GMT) on Thursday. Friday sees U.S. PCE inflation, the Fed's preferred gauge. FIRST FED CUT SEEN IN SEPTEMBER

Markets currently see the Fed's first rate cut coming in September, though they have not ruled out July. "I think the inflation data that we have recently seen has been a bit of an anomaly, the trend is still down inflation and the Fed will still do two cuts this year," said Thooft.

"We've seen the recent run up in yields, and them now stall, and I think it rolls over," Thooft added. He expects European government bonds to continue to trade broadly in line with their U.S. peers and be responsive to Fed expectations. The U.S. 10-year yield was last 4.64%, just shy of five-month highs hit earlier in April.

Investor eyes were also on Spain, after the country's Prime Minister Pedro Sanchez said on Wednesday he would step back from public duties "for a few days" to decide whether he wanted to continue leading the government after a court launched a business corruption probe into his wife's private dealings. However, markets were not significantly concerned. Spain's 10-year yield was flat on the day at 3.37% and the spread between that and Germany's was 78.9 basis points (bps), also little changed.

Also in the mix on Thursday were remarks from European Central Bank (ECB) board member Isabel Schnabel, who said the final stage of getting euro zone inflation back to 2% would be bumpy and an erosion in productivity, along with high services costs, posed some of the biggest risks. ​Italy's 10-year yield was down 2 bps at 3.94%, having hit a two-month high on Wednesday, and the gap between Italian and German bunds was almost unchanged at 135 bps.

Germany's two-year bond yield, which is more sensitive to ECB rate expectations, was down 1 basis point at 2.95%. (Editing by Alex Richardson)

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