European bond yields higher on strong euro zone PMIs, Jackson Hole looms

By Lucy Raitano

LONDON, Aug 21 (Reuters) - Euro zone bond yields inched higher on Thursday as markets digested better than expected euro zone business activity data and geared up for the Federal Reserve's annual symposium in Jackson Hole.

Germany's 10-year yield DE10YT=RR was up 3 basis points at 2.743%, while the rate-sensitive 2-year yield DE2YT=RR rose by 4 bps to 1.97%.

"Today for a change we actually have some data to move on," said Peter Schaffrik, chief European macro strategist, head of UK & European economics & rates strategy at RBC.

He pointed to earlier purchasing managers' index (PMI) releases from the euro zone and Britain as the main reason for rising yields - particularly at the short-end of the curve.

Euro zone businesses saw new orders increase in August for the first time since May 2024, the data showed, helping overall activity expand at the fastest pace in 15 months despite persistent weakness in exports.

UK PMIs also showed stronger than expected growth on Thursday, with British businesses recording their strongest month in a year thanks to a rebound in the dominant services sector.

Other data also showed Britain's public borrowing in the financial year so far has matched the forecasts that underpin the government's tax and spending plans. This offered a bit of breathing space to finance minister Rachel Reeves before bigger challenges later this year.

UK 10-year gilts were 6 bps higher at 4.734% GB10YT=RR.

Looking ahead, Fed Chair Jerome Powell's speech on Friday will be key as traders assess the chances of a September rate cut by the U.S. central bank.

Money markets currently see an 80% chance of a 25 bps rate cut at the Fed's next session in September. IRPR

"This renewed bid into the front end of the treasury curve is coming from two fronts - one from weaker labour market data but also from the pressure the Fed is receiving," RBC's Schaffrik said.

Traders ramped up bets for rate cuts after a weak U.S. payrolls report at the start of this month, although signs of underlying inflation pressures complicated the picture.

The number of Americans filing new applications for jobless benefits rose by the most in about three months last week, data showed on Thursday, adding to signs that the U.S. labour market is weakening.

Meanwhile, questions about the Fed's independence have resurfaced after Trump on Wednesday called on Fed Governor Lisa Cook to resign on the basis of allegations made by one of his political allies over mortgages she holds. Cook says she has "no intention of being bullied" to leave the Fed.

Any changes in Fed rate expectations often influence other bond markets given the scale of the U.S. economy, the world's largest.

Italy's 10-year yield was 3 bps higher at 3.58%. IT10YT=RR.