German Bund yields edged up on Friday and were on track for their biggest weekly rise in a month on growing talk that another hike in US interest rates will come sooner rather than later. Hawkish comments from US Federal Reserve officials, Fed minutes suggesting a June rate hike could be on the table and strong economic data have refocused market attention this week on higher US rates - hurting stock and bond markets and boosting the dollar.
But a lack of conviction that a rate hike is imminent, and a feeling that ultra-easy monetary policy in the euro area would provide a strong buffer to euro zone bond markets, prevented a sharper rise in German yields. "European government bonds are insulated a lot from the concerns about the Fed because the ECB has made it clear it is not going to be hiking in the coming couple of years and the asset purchase programme keeps yields and spreads compressed," said Chris Scicluna, head of economic research at Daiwa Capital Markets.
Germany's 10-year bond yield - the benchmark in Europe - held steady at 0.17 percent, within sight of a two-week high hit the previous day. Other euro zone bond yields were mostly higher, though Spanish and Italian yields dipped about 3 bps each. Several ECB policymakers urged patience with its monetary policy on Friday, supporting expectations that the bank will stick with wait-and-see at its next meeting on June 2.
New York Federal Reserve President William Dudley said on Thursday the US economy could be strong enough to warrant a rate increase in June or July. "On balance, the absence of a hike is more likely than a rate hike in June," said Antoine Bouvet, rates strategist at Mizuho. "Euro zone bonds will be affected by a sell-off in Treasuries, but the magnitude won't be the same."
While German Bund yields were on track for their biggest weekly rise in a month, with an increase of about 5 bps, US 10-year Treasury yields looked set to end Friday with a rise of just over 14 bps in the biggest weekly jump since early November. Analysts said they were also watching Greece where parliament will vote on tax hikes and reforms demanded by its international lenders on Sunday, two days before euro zone finance ministers assess whether Athens qualifies for much-needed bailout loans. The lenders say Athens must pass the reforms before the Eurogroup meeting on May 24 to wrap up the review and so unlock the next tranche of funds that Athens will use to pay IMF loans, state arrears and ECB bonds maturing in July.
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