Euro zone bond yields rise ahead of inflation data

LONDON, May 2 (Reuters) – Euro zone government bond yields rose sharply on Tuesday, playing catch-up with US Treasuries as markets reopened after a holiday and traders waited for inflation data for the bloc.

US yields rose on Monday, in a sign of relief about JPMorgan’s takeover of ailing US lender First Republic and after strong economic survey data suggested the Federal Reserve might need to raise interest rates further to tame inflation.

Germany’s 10-year yield, the benchmark for the bloc, was up 6 basis points (bps) at 2.375% on Tuesday, having risen more than 10 bps early in the session. Yields move inversely to prices.

It followed a 12 bp rise in the US 10-year Treasury yield on Monday, which was last down 4 bps at 3.538% on Tuesday.

“The key point is what happened yesterday with the ISM report and the fact that potentially you have some contagion from the US situation on the Euro situation,” said Florian Ielpo, head of macro at Lombard Odier, referring to Monday’s US survey data, which showed some signs of inflationary pressures.

Global bond yields fell sharply when cracks began to show in the banking system in mid-March, yet have since rebounded somewhat as central banks have made clear that fighting inflation is a priority.

The euro zone’s latest inflation figures, for April, are due at 0900 GMT and will be a key data point ahead of the European Central Bank’s monetary policy decision on Thursday.

Lombard Odier’s Ielpo said yields could fall in the coming weeks if US and European inflation cools faster than expected and banking problems continue.

Germany’s 2-year bond yield, which is sensitive to interest rate expectations, rose 7 bps to 2.798% on Tuesday.

Italy’s 10-year bond yield was up 8 bps at 4.262%. That pushed the gap between German and Italian 10-year borrowing costs – a closely watched a gauge of investor sentiment towards the euro zone’s more indebted countries – up slightly to 188 bps.

Also on investors’ radars will be the ECB’s quarterly bank lending survey, due at 0800 GMT.

Data earlier in the day showed German retail sales fell 2.4% in March, a much worse reading than the 0.4% increase economists had expected.

France’s 10-year bond yield was up 8 bps at 2.969%.

Ratings agency Fitch cut the country’s credit rating by one notch to AA- on Friday, saying potential political deadlock and social unrest posed risks to President Emmanuel Macron’s reform agenda.

(Reporting by Harry Robertson; Editing by Kirsten Donovan)