Euro zone government bond yields edged up as market participants assessed heightened tensions between Russia and the West while waiting for purchasing manager surveys (PMI), which could affect expectations for the European Central Bank’s policy easing path.

Russia had described a strike by US missiles, which Ukraine used to hit a target inside the country, as an escalation in the 1,000-day-old war.

Germany’s 2-year yield, which is more sensitive to ECB policy rate expectations, rose one basis point (bp) to 2.13%.

It hit 2.091% on Tuesday, its lowest since Oct. 24.

Markets priced in an ECB depo rate at 1.95% in July while fully discounting a 25 bps cut in December and a 20% chance of a 50 bps move.

Germany’s 10-year yield, the benchmark for the euro area, was up one bp at 2.35%.

Euro zone yields rise after better than expected data

Italy’s 10-year government bond yields, the benchmark for the euro area periphery, rose 2 bps to 3.59%.

The yield spread between Italian and German yields – a gauge of the premium investors demand to hold Italy’s debt – was at 123 bps after reaching 115.90 on Tuesday, its tightest level since mid-March 2024.

Analyst expect a possible upgrade by Moody’s on Friday.

The gap between French and German yields was at 75 bps after hitting 70.9, its tightest since Oct. 31.