Jan 18 (Reuters) - Euro zone yields edged up to new six-week highs on Thursday in the wake of U.S. data showing jobs growth remains solid and as the European Central Bank (ECB) enters its quiet period before next week's rate-setting meeting.
Germany’s 10-year bond yield, the benchmark for the euro area, was up three basis points (bps) at 2.31%, its highest since Dec. 5.
It had been trading largely flat earlier in the day, but ticked up in the slipstream of U.S. yields which rose after the Labor Department said the number of Americans filing new claims for unemployment benefits fell last week to the lowest level since late 2022.
That data was the latest of several developments that have caused investors this year to reassess their earlier expectations that major global central banks will be cutting rates as early as March.
That scaling back of expectations has weighed on bond prices, which move inversely to yields.
Money market bets imply 138 bps of ECB rate reductions in 2024, and just an 80% chance of a first move in April. That had been fully priced until this week.
They see less than a 20% chance of a rate cut in March, which was all but priced-in in late December. .
Remarks from ECB and Fed officials pushing back on imminent rate cuts, as well as some better than feared economic data, and signs of sticky inflation have all contributed to the reassessment, though meaningful rate cuts are still expected this year.
Deutsche Bank confirmed on Thursday its forecast for two 50 bp rate cuts - in April and June - assuming the ECB will continue to be surprised to the downside by growth and inflation, which it expects to be down to target by mid-2024.
There could also be some weakening in what has latterly been a very close relationship between rate expectations and yields.
"The (Bund) sell-off may have further to run near-term, but ultimately average around current levels to end-March," Citi rates strategists said in a research note.
"We expect growing de-coupling (of Bund yields) to near-term rate cut prospects given: easing is likely, just pushed out; the risk that the ECB waits too long and then has to start quickly; and still stable inflation risk premium," they added.
The ECB meets next week and in the seven days before that members of its Governing Council must avoid making comments that could influence expectations about monetary policy.
German 2-year yields were flat at 2.68%.
Italy's 10-year government bond yield, the benchmark for the euro area's periphery, was flat at 3.91% reversing an earlier small fall in afternoon trading in the light of the U.S. data.
It hit a one month high of 3.938% on Wednesday.
The gap between Italian and German 10-year yields was at 159 bps, towards the low end of its recent range.
Peripheral bonds still benefit from solid demand from investors keen on locking in elevated yields that should fall soon as the ECB reduces rates.
"We expect (ECB President) Christine Lagarde to push back against expectations for rate cuts in the first half of this year (at Thursday's policy meeting)," said Jack Allen-Reynolds, deputy chief euro zone economist at Capital Economics.
"Nevertheless, we think the first cut will come in the second quarter," he added. (Reporting by Stefano Rebaudo, additional reporting by Alun John; Editing by Mark Potter and Hugh Lawson) ;))
