Euro zone government bond yields edged higher on Thursday after the US Federal Reserve warned about the risks of higher inflation and unemployment, with investors now looking towards the Bank of England’s monetary policy meeting later in the day.
The Fed held interest rates steady on Wednesday but said those risks clouded the US economic outlook as policymakers grapple with the impact of President Donald Trump’s tariffs.
Germany’s 10-year yield, the euro area’s benchmark, rose 0.5 basis points (bps) to 2.48%. It hit 2.556% on Tuesday, its highest level since April 14.
“While the Fed sees increased risks to both employment and inflation, this assessment is probably obvious given the tariff backdrop,” said Hauke Siemssen, rate strategist at Commerzbank.
“More insightful were (Fed chair Jerome) Powell’s repeated remarks that there is no real cost to waiting as the labour market is still doing well while inflation has come down,” he added, arguing that markets did not interpret this as overly hawkish.
US Treasury yields edged higher, with the 10-year up 2.0 bps at 4.29% after dropping the day before, while the policy-rate sensitive 2-year yield was roughly unchanged.
Money markets priced in a European Central Bank deposit facility rate at 1.6% after falling to below 1.55% in mid-April as the ECB suggested it was ready to cut rates in response to the potential adverse impact of US tariffs.
Euro zone bond yields rise, Ukraine in focus
German 2-year yields, more sensitive to European Central Bank policy rates, rose 1.0 bp to 1.74%.
The BoE is expected to lower rates by 0.25 bps, and some economists think it will soon need to speed up its gradual approach to rate cuts.
Citi expects the British central bank to validate the recent scaling back of rate cuts priced into derivatives markets “rather than push it any further”.
Markets are currently pricing 95 bps of monetary easing by December from 145 bps at the end of March before the announcement of US tariffs by Trump.
Some analysts argued the BoE could end up more hawkish than expected as hard economic data shows no signs of a deteriorating outlook and the impact of tariffs will be small since the UK has limited exposure to US goods demand.
Italy’s 10-year yield was up 1.0 bp at 3.57%, leaving the spread between it and Germany’s Bund yield – a market gauge of the risk premium investors demand to hold Italian debt – at 104 basis points.
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