LONDON, Feb 23 (Reuters) - German bond yields were on track for their third straight weekly increase on Friday as economic data and central bank officials continued to chip away at investors' hopes for rapid interest rate cuts this year.
Germany's 10-year bond yield, the benchmark for the euro zone, was last up 4 basis points (bps) at 2.471%, putting it on track to rise 7 bps for the week.
Investors on Friday were expecting around 90 bps of interest rate cuts from the European Central Bank this year, implying fewer than four 25 bp reductions, according to money market pricing. That's down from around 102 bps on Monday and more than 150 bps at the start of February.
Economic data, particularly in the United States, has been stronger than expected, while central bankers have explicitly said they are not thinking of cutting interest rates until the middle of the year.
Sean Kou, rates strategist at Societe Generale, said the rise in yields was driven by an ongoing repricing of central bank rate-cut expectations given that economies are holding up better than anticipated.
"We're more in the soft landing scenario (for the euro zone economy), where rate cut pricing might disappoint going forwards," Kou said on Friday.
ECB data out on Friday showed that inflation expectations among euro zone consumers ticked up to 3.3% for the year ahead, from 3.2% previously. Separate figures showed German business sentiment brightened despite the travails of Europe's largest economy.
Germany's 2-year bond yield, which is sensitive to ECB rate expectations, was last up 4 bps at 2.954%, its highest since late November.
Survey-based data on Thursday showed the downturn in euro zone business activity eased in February, hinting at signs of recovery, even as Germany's slump deepened.
Overnight, Federal Reserve official Christopher Waller said policymakers should delay rate cuts by at least a couple of more months to see if a January uptick in inflation will abate.
Given the similar paths of American and euro zone inflation, as well as the overwhelming importance of the U.S. economy, the two bond markets tend to move together. U.S. yields were also up by around 3 to 4 bps on Friday.
ECB official Robert Holzmann said on Friday the central bank is unlikely to cut before the Fed because of the strong links between the two economies, Bloomberg reported.
Italy's 10-year bond yield was last up 4 bps at 3.953%. The closely watched gap between Italy and Germany's 10-year bonds remained subdued at 147 bps, around its lowest since early 2022.
(Reporting by Harry Robertson; editing by Mark Heinrich)
