Eurozone rates are rising, US data are awaited and tensions in the Middle East are taking center stage

Euro zone government bond yields rose on Thursday, remaining near multi-month lows and mirroring moves in US Treasuries, while markets continued to assess a less than 50% chance of a European Central Bank rate cut in 2026.Investors were also concerned about the potential inflationary impact of a further rise in oil prices, driven by escalating tensions between the US and Iran.

Brent futures rose as Russia urged both Tehran and “other parties” to exercise caution and restraint.
However, fixed income markets are expected to remain in a wait-and-see mode ahead of a set of US data due on Friday.

The yield on German ten-year government bonds, the benchmark for the eurozone, rose by 1.5 basis points (bps) to 2.76%. Interest rates reached 2.725% on Tuesday, the lowest level since December 1, and were around 2.90% at the beginning of this month.

WEAK SIGNALS FROM EURO AREA DATA

Euro area economic data offered some weak signals, including a further contraction in the European Union’s trade surplus as tariffs weighed on rising Chinese imports crowding out domestic production, and German investor morale unexpectedly fell in February.

U.S. Treasury yields rose, with the 10-year yield rising 1.5 basis points to 4.10%, after rising the day before as solid economic data reinforced expectations that the Federal Reserve would leave rates unchanged. It reached 4.018% on Tuesday, the lowest level since November 28.Barclays analysts said the Federal Reserve’s minutes reinforced their view that risks around the key interest rate path are tilted to the upside, noting that any easing measures could easily be postponed if inflation pressures prove more persistent than expected.

They still expect the Fed to make two rate cuts this year.

U.S. policymakers agreed almost unanimously at their meeting last month on leaving rates unchanged, but remained divided on their next steps.

Traders now see a 30% chance of a rate cut in December 2026, up from 20% last week, although expectations have eased from more than 40% on Tuesday.

“To achieve this (to increase the likelihood of an ECB rate cut) we will probably need a sharp drop in inflation, a much stronger euro or a series of deteriorating growth figures,” said Michiel Tukker, interest rate strategist at ING.

PERFORMANCE CURVE STEPS

“We don’t see any of these factors materializing in the very near term,” he added, arguing that he expects further steepening of the yield curve as long-term borrowing costs rise.

The German two-year yield, which is more sensitive to the policy rate outlook, rose by 1.5 basis points to 2.07%.

The yield on Italian government bonds with a term of 10 years rose by 2 basis points to 3.37%. The difference with the Bunds stood at 59.60 basis points, after falling to 53.50 in mid-January, the lowest level since August 2008.