Euro zone bond yields edge higher with Middle East conflict, central bank meetings in focus
Euro zone yields were slightly higher on Thursday, as investors focused on a series of monetary policy decisions while watching developments in the Middle East.
The U.S. central bank held rates steady as widely expected on Wednesday, with Chair Jerome Powell saying he expected to see more tariff-driven price hikes in coming months.
Investors were also watching a series of central bank policy decisions in Europe, with Norway's central bank's surprise rate cut in focus.
Meanwhile, financial markets remained on edge over the possible entry of the United States into the week-old Israel-Iran conflict.
Germany's 10-year bond yield was up 2 basis points on the day at 2.52%, retracing some of the previous day's fall, but still trading within its recent range.
The yield on the two-year Schatz was up half a basis point at 1.85%.
Norway's central bank unexpectedly cut its policy interest rate by 25 basis points to 4.25% on Thursday, its first reduction of borrowing costs in five years.
The decision sent yields on the 3-year Norwegian bond down 17 bps in their biggest intraday drop since March 2023.
"Obviously, today's decision to cut rates was a big surprise," said Erica Dalstoe, chief strategist for Norway at SEB.
After the earlier-than-expected reduction on Thursday, markets have now priced in the risk of an additional rate cut by the end of the year compared to the two cuts in 2025 expected previously, Dalstoe said.
She said that "pretty much explains the reactions we're seeing in the short end of the yield curve."
Elsewhere, the Swiss National Bank cut its interest rate to zero as expected.
Investors will now turn to the Bank of England's policy decision and outlook later in the day, with the bank expected to keep rates unchanged.
If the European Central Bank decides to move on interest rates in the next six months, it would most likely be a cut, ECB policymaker Francois Villeroy de Galhau said on Thursday, while Bundesbank President Joachim Nagel said the ECB was on the right track when it came to monetary policy.
The ECB signalled a pause in policy easing this month despite projections showing price growth dipping below its 2% target temporarily due to the strong euro and low oil prices.
Italy's 10-year bond yield, the benchmark for the euro zone periphery, was 3 bps higher at 3.515%.
The gap between Italian and German yields was wider on the day at 99.10, after hitting its widest in three weeks earlier in the session.
(Reporting by Linda Pasquini; Editing by Amanda Cooper, Emelia Sithole-Matarise and Jane Merriman)
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