German Bund yields rise after US data, Fed, tariffs still in focus

By Stefano Rebaudo

Feb 12 (Reuters) - German government bond yields rose by over 10 bps in the last two days as Federal Reserve Chair Jerome Powell said the central bank is not in a rush to cut interest rates, and U.S. data supported expectations for a pause in the monetary easing cycle.

U.S. consumer prices increased by the most in nearly 1-1/2 years in January.

Powell said the Fed was in no hurry to make any further interest rate cuts but stood ready to do so if inflation declines further or the job market weakens.

Traders priced in 26 basis points (bps) of Fed rate cuts by year-end IRPR. They discounted 40 bps on Tuesday before Powell's speech.

Germany's 10-year bond yield DE10YT=RR, the euro area's benchmark, was last up 5.5 basis points (bps) at 2.48%, the highest since January 31, after rising by 7 bps the day before.

U.S. Treasury yields US10YT=RR jumped 12 bps to 4.65%.

German borrowing costs edged up to a one-week high before the U.S. figures as markets digested tariff developments, comments from the Fed chair and a rise in energy prices.

"Today's inflation data support our view that inflation will remain above target throughout this year, preventing the Fed from cutting interest rates," said Atakan Bakiskan, U.S. Economist at Berenberg.

"Although disinflation in shelter and non-market-based services can help build this confidence (that the inflation trend is moving downward), the Fed cannot ignore Trump."

Analysts expect tariffs to boost inflation in the U.S., while in the euro area, they could trigger a deflationary shock, as the negative impact on growth may outweigh the inflationary effects of retaliatory measures.

However, European gas prices (TTF) have reached the highest in almost two years this week, and re-ignited inflation concerns among market participants.

"With the recent rise in commodity prices and the levying of trade tariffs, the risk of further upside surprises will be front-of-mind for investors and the Federal Reserve," said Colin Finlayson, fixed income investment manager at Aegon AM.

Work on the administration's reciprocal tariffs is ongoing, and talks with other nations are underway, U.S. President Donald Trump's economic adviser, Kevin Hassett, said on Wednesday.

Money markets priced in a European Central Bank deposit facility rate at 1.97% in December EURESTECBM7X8=ICAP from 1.85% on Monday before Powell's speech. The deposit rate is currently at 2.75%.

Germany's 2-year yield DE2YT=RR rose 5 bps to 2.13%.

Italy's 10-year yield IT10YT=RR was up 3.5 bps at 3.56%. The yield gap between Italian and German yields DE10IT10=RR was at 108 bps.