LONDON, May 29 (Reuters) - Euro zone benchmark Bund yields surged to their highest level in over six months on Wednesday after data showed German inflation rising slightly more than expected.
In Germany, cooling energy and food prices have had an easing effect on inflation this year - but core inflation, which excludes those more volatile elements, has remained high.
Germany, Europe's largest economy, publishes its figures before euro zone inflation and the U.S. personal consumption expenditure data which are due to be released on Friday.
The German 10-year bond yield, the benchmark for the euro zone bloc, rose 5 basis points (bps) to 2.64%, after hitting 2.651% for its highest level since the end of November.
"The bond market started on the back foot this morning after a Fed official didn’t rule out a rate hike," said Massimiliano Maxia, senior rate strategist at Allianz Global Investors.
Minneapolis Federal Reserve Bank President Neel
Kashkari
said that the U.S. central bank should wait for many more months of positive inflation data before cutting rates, adding it could even hike rates if inflation fails to drop.
"German data showing that core inflation has remained high are more consistent with two than three rate cuts in 2024," Maxia added.
Money market traders are almost certain that the European Central Bank will cut rates next week and are pricing in around 60 bps of monetary easing by year-end, which implies two 25-bps moves by year-end and a 40% chance of a third cut.
Italy's 10-year yield touched a more than one-month high and was last up 5 bps at 3.95%, while the gap between Italian and German bunds was at 130 bps.
Germany's 2-year yield, which is more sensitive to ECB rate expectations, was 1.9 bps higher at 3.07%.
The yield spread between U.S. 10-year Treasuries and German bunds narrowed by 2 points to 192 bps, having briefly surged to 196.5 bps - its highest since mid-May - earlier in the day. (Reporting by Joice Alves and Stefano Rebaudo; editing by David Goodman and Ana Nicolaci da Costa)
