German 10-year yields inch higher as ECB expected to keep rates on hold

By Sophie Kiderlin

LONDON, Feb 5 (Reuters) - Euro zone bond yields were broadly steady on Thursday against a backdrop of fragile global markets and ahead of a European Central Bank interest rate decision which investors widely expect will keep rates unchanged.

Germany's 10-year yield DE10YT=RR, the benchmark for the euro zone, was last up by around one basis point (bp) at 2.8749%.

German 2-year yields, DE2YT=RR which are sensitive to interest rate expectations, were last steady at 2.0783%.

Market participants are almost certain the ECB will leave interest rates at 2% at its policy meeting later in the day, according to derivative prices.

Money market traders were also not anticipating any changes to rates throughout 2026, as inflation is hovering around the central bank's 2% target and growth appears solid.

Italy's 10-year bond yield IT10YT=RR was last up 2 bps at 3.4997%, around where it started the year.

Euro zone bloc-wide inflation data released Wednesday showed that headline inflation eased to 1.7% in January.

Even so, analysts say recent euro strength has stoked concerns about potential deflationary pressures growing and pressuring the ECB to trim interest rates.

"Now it turns a little bit into 'maybe inflation is a little bit lower than expected, the euro a little bit stronger, could there be another cut in the future,'" said Felix Schmidt, senior economist at Berenberg.

He noted it would be a question for ECB President Christine Lagarde whether she sees any downside risk to inflation that could lead to another cut.

"But overall, I think the risks to inflation are still balanced. So our base case is there will be no cut and no hike," Schmidt said.

Investors will have to wait until the March meeting for updated detailed economic projections from the central bank.

Elsewhere, broader markets were shaky on Thursday as worries about the cost of AI investment shook up equity markets, while bitcoin pulled back amid a rout in cryptocurrencies and silver tumbled again, just days on from a sharp selloff.