July 13 (Reuters) - German government bond yields edged higher on Wednesday, after falling sharply for two days, as investors took a breather ahead of U.S. inflation data later in the session.
An easing of annual core inflation, expected by economists polled by Reuters, is likely the most crucial element of the report as investors look for further confirmation that inflation has peaked. That could potentially convince the Federal Reserve not to become more aggressive in its interest rate hikes.
Investors recently scaled back their expectations for European Central Bank's rate hikes amid recession fears triggered by surging energy prices and possible gas supply cuts from Russia.
Germany's 10-year government bond yield, the bloc's benchmark rose 1.5 basis points to 1.15%, still within striking distance of its 6-week low of 1.071% hit last week.
Most analysts forecast a quick monetary tightening this year and a pause or even a reversal in 2023.
Nomura expects the ECB to raise rates by 1.75 percentage points by March 2023 and to cut by a quarter point in June 2023.
Money markets are still pricing around 140 basis points of ECB rate hikes in 2022 and 180 basis points by the end of 2023.
"The window for hiking rates at the ECB is closing fast. This certainly is an argument for hiking 50bp at next week's meeting, instead of the 25bp signalled by president Christine Lagarde," ING analysts said.
They also reckoned that front-end eurozone rates had been moving lower recently "compared to unrealistic market pricing regardless of the size of the ECB hike."
Italian bond prices underperformed their peers as political concerns are becoming more pressing, with the 10-year yield rising by 4.5 basis points to 3.237%.
The spread between Italian and German 10-year government bond yields widened to 209 basis points.
A crucial vote of confidence on a stimulus package will take place in the Italian Senate this week, and it is still unclear whether the 5-Star Movement will leave the coalition. Prime Minister Mario Draghi said he would leave office if the 5-Star pulled out of his coalition. (Reporting by Stefano Rebaudo, Editing by Tomasz Janowski)
