Euro zone interest swap rates tracked bond yields higher on Friday but retreated from peak levels after a measure of US producer prices came in flat in March, easing some fears that inflation may prevent the Federal Reserve from cutting rates for many months.
The Fed recently reiterated that inflation remains its main concern and said it may have to raise rates to keep it in check. But the flat March reading of core producer prices, which exclude food and energy costs, diminished jitters about elevated inflationary pressures.
That in turn partly soothed European fixed income markets which have been taking a battering as traders move to price in higher European Central Bank interest rates by the end of the year. Two-year swap rates were at 4.349 percent, from 4.335 on Thursday, while 10-year rates were at 4.466 percent from 4.448 percent.
The 2s-10s curve steepened to 12.1 basis points from 11.3 basis points on Thursday, while the 10s-30s curve was at 15.2 basis points from 13.7. "The front end is getting protection from the rise in the currency and should remain fairly well protected and in a range, which means the curve is rather directional," said BNP Paribas' Beuzit.
Euribor interest rate futures were flat to two basis points lower with longer-dated contracts into 2008 under-performing. Markets are now pricing in that rates will rise to 4.0 percent by the end of the first half, with a 50 percent chance of them reaching 4.25 percent by year-end.
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