German bund yield hits three-month high after inflation data

(Updates after German inflation data)

By Samuel Indyk

LONDON, Feb 29 (Reuters) - Germany's 10-year yield hit a three-month high on Thursday after data from Germany, France and Spain showed progress on disinflation but likely not enough to prompt the European Central Bank to cut interest rates in March or April.

Annual inflation slowed in six economically important German states in February, suggesting that the national figure released later on Thursday will continue its downward trajectory.

French data showed prices rising slightly more than expected, by 3.1% in February, although down from 3.4% the month before, while Spanish data showed EU-harmonised inflation falling to 2.9%, in line with expectations.

"Inflation is still a little bit higher than everybody would have expected a few months ago," said Anders Svendsen, chief analyst at Nordea.

"If you look at the January numbers, the monthly increases were quite high and if that's the case again in February it will challenge the narrative of gradually falling inflation."

Goldman Sachs economist Christian Schnittker slightly upgraded his forecasts for euro area headline and core inflation.

Germany's 10-year yield, the euro area's benchmark, was last up 4.5 basis points (bps) at 2.504%, its highest level since November 28 last year.

The two-year yield, which is more sensitive to changes in interest rate expectations, was up 4.5 bps at 2.9702%.

"The data was broadly in line and markets are still pricing in June as the first possible date for a rate cut and that's our view too," said Sebastian Grupp, fixed income analyst at DZ Bank.

At the beginning of the year, markets were betting on the April meeting as the most likely time for the ECB to begin cutting rates, with outside bets of a March cut, but stickier inflation in Europe and the U.S. has pushed back expectations for easing.

Nordea's Svendsen says such repricing -- which has seen markets trim expectations for cuts in 2024 to around 90 bps from around 150 bps at the start of the year -- may be close to an end.

"I think it's difficult to price down to less than three rate cuts given that the ECB is fixated on June and it will be hard to see them go slower than once per quarter," Svendsen said.

"I think we are close to the end of the front-end sell-off and in time you'll see people interested in buying bonds again, especially in the short-end."

Elsewhere, Reuters reported that the ECB will continue putting a "floor" under market interest rates in the years to come, but banks will play a greater role in deciding how much liquidity they want, citing four sources.

Italy's 10-year yield, the benchmark for the euro zone periphery, was up 5 bps at 3.944%.

Ten-year bond yields in France and Spain were also up around 4.5-5 bps on the day. (Reporting by Samuel Indyk Editing by Keith Weir and Christina Fincher)