Euro Zone Bond Yields Climb Amid Strong U.S. Producer Price Inflation

Euro zone bond yields rose on Friday following stronger-than-expected U.S. producer price inflation data for June. However, they remain poised for a weekly decline due to weak U.S. consumer prices reported earlier. German and French yields increased slightly while Italy’s yield narrowed its gap with Germany's.

Euro zone bond yields experienced a minor rise on Friday after data highlighted stronger-than-expected U.S. producer price inflation in June. Despite this uptick, they are on course for a weekly decline following a substantial drop after weak U.S. consumer price figures earlier in the week.

The benchmark German 10-year bond yield rose by 4 basis points (bps) to 2.511%, roughly 1 bps higher post data release yet projected to end the week about 2 bps lower following a 7 bps drop on Thursday. Yields generally move inversely to prices.

Year-on-year producer price index inflation rose to 2.6% in June from May's 2.4%, surpassing economist predictions of 2.3%, nudging U.S. and euro zone yields upward. Nevertheless, they are set for a weekly fall after June's consumer inflation figures revealed a 0.1% month-on-month decline, impacting both U.S. and euro zone yields.

Germany's two-year bond yield increased by 4 bps to 2.836% after a 10 bps drop the previous day. U.S. economic data, given the nation's economic heft and the dollar's significance, exert a global market influence.

France's 10-year bond yield, closely monitored post-Sunday's hung parliament election, climbed 4 bps to 3.163%, targeting a weekly 4 bps fall. The spread between French and German borrowing costs remained stable at 65 bps.

Italy's 10-year yield rose 3 bps to 3.814%, slightly narrowing its gap with Germany's yield to 130 bps. Meanwhile, attention turns to the European Central Bank's forthcoming interest rate decision next week, with market consensus deeming another rate cut highly improbable.

"Recent data and ECB remarks signify virtually no risk of a rate cut at the upcoming July meeting, with a hold being virtually assured," noted TD Securities strategists. "Focus will pivot to whether President Christine Lagarde signals a potential cut in September."

(With inputs from agencies.)