Bond yields rose in Europe and the U.S. on Friday as inflationary pressures kept expectations for further Federal Reserve interest-rate increases strong.
The 10-year Treasury yield rose 2.4 basis points, to 5.133%, from Thursday's settlement of 5.102%, according to Tradeweb. The two-year dropped to 4.850% from 4.862%.
Inflation worries eased somewhat after the October U.S. Producer Price Index surprised on the downside, slowing to a 0.3% gain from 1.4% in September. Economists surveyed by The Wall Street Journal expected 0.4%.
Recent inflation data, however, kept markets fully pricing in an interest-rate boost by the Fed in December, an outlook supported by hawkish policymakers' remarks.
The 10-year German Bund yield increased 0.039 percentage point, to 3.398%, while yields on 10-year eurozone peer bonds also rose.
While most analysts agree that the Fed will raise interest rates in December, they continue to ponder the size, speed and frequency.
Upside growth surprises in the U.S. suggest that current monetary policy is not restrictive and support the notion that the Fed has more tightening to do, said Jussi Hiljanen, chief U.S. and eurozone rates strategist at SEB.
Despite hints by Fed governor Christopher Waller at the possibility of a 50-basis-point interest-rate increase, SEB expects the Fed majority to lean toward smaller and gradual steps at every second meeting, with a 25-basis-point boost in December to be followed by another of similar size in March, Hiljanen said.
On Thursday, Cleveland Fed President Beth Hammack said she prefers smaller, steadier changes in monetary policy because they make it easier for businesses and households to plan.
San Francisco Fed President Mary Daly on Thursday at an event in Palo Alto, Calif., said: "My bias is that further tightening will be needed because you just see this consistent pressure on inflation that isn't simply in the sectors that are most directly affected by tariffs or oil."
Money markets price in an 91% probability of a 25-basis-point Fed interest-rate boost in December, while they assign an 9% probability to a 50-basis-point increase, according to LSEG data.
Jefferies maintains expectations for a 25-basis-point rate rise in December.
"But beyond December, the outlook will depend on the war and the oil prices," global economist Mohit Kumar said in a note. "If the current state of 'no war no peace' continues for the next couple of months, we could see the case for a Fed hike in January," Kumar said.
Later Friday, S&P Global Ratings is expected to review Italy's credit rating, currently at BBB+ with a positive outlook.
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