Euro zone government bond yields rise after sticky US inflation

The U.S. 10-year yield surged to its highest since early November and was last 6 bps higher at 5.71%. 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 rose to a fresh five-month high on Thursday after a measure of U.S. inflation accelerated more than expected in the first quarter, reinforcing bets that the Federal Reserve would not cut interest rates before September. Even as growth was weaker than previously thought, with U.S. gross domestic product (

GDP ) increasing less that economists expected at a 1.6% annualized rate last quarter, the personal consumption expenditures (PCE) price index - excluding food and energy - increased at a 3.7%, above expectations.

Germany's 10-year bond yield, the benchmark for the euro zone, rose 5 basis points to 2.63%, briefly touching its highest level since November. The U.S. 10-year yield surged to its highest since early November and was last 6 bps higher at 5.71%.

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.

Thooft expects European government bonds to continue to trade broadly in line with their U.S. peers and be responsive to Fed expectations. Markets currently see the Fed's first rate cut coming in September, though they have not ruled out July.

SPAIN POLITICS 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.

Spain's 10-year yield was up 5.8 bps on the day at 3.44%, with moves in line with the German and U.S.-10 year yields. 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 up 4.7 bps at 4.00%, having hit its highest since December earlier in the day. The gap between Italian and German bunds was at 136 bps. Germany's two-year bond yield, which is more sensitive to ECB rate expectations, was up 5 bps at 3.01%.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)