Rising Inflation and Shifting Bond Markets: Impact on ECB Rate Expectations

Eurozone bond yields rose as inflation in key German states suggested a possible increase in the national rate. This casts doubt on the anticipated ECB rate cut. Germany's GDP growth helps avoid recession, while the market reduces bets on significant rate cuts amidst changing yield spreads in Italy and Germany.

On Wednesday, eurozone bond yields experienced an upward trend after inflation figures from five German states suggested potential increases in the national inflation rate. These developments dampened hopes of a substantial European Central Bank (ECB) rate cut in December. Analysts await national inflation statistics, anticipated to be released at 1300 GMT.

Spain's 12-month inflation aligned with projections at 1.8%, while Germany's GDP grew unexpectedly, diverting the economy from a recession. "The reaction stems from German inflation data, showing higher state-level figures," stated DZ Bank's senior rates analyst, Sophia Oertmann. Money markets subsequently adjusted their predictions for the ECB's policy meeting.

Germany's two-year yield, reflecting interest rate expectations, reached a two-week peak of 2.223%, while the 10-year benchmark yield slightly declined. Meanwhile, Italy's 10-year yield rose following a successful bond auction. Market focus also shifted to Britain's new Labour government budget, with Finance Minister Rachel Reeves poised to introduce significant tax changes.

(With inputs from agencies.)