LONDON, April 19 (Reuters) - The euro area benchmark Bund yield hit its highest in almost five months on Friday as demand for safe-haven assets receded, while investors reduced their bets on European Central Bank interest rate cuts after recent robust U.S. data.
Bond yields move inversely with prices.
Markets now see fewer than three 25 basis point (bps) ECB rate cuts in 2024. Forwards on ECB euro short-term rates (ESTR) on Friday implied 72 bps of monetary easing from 85 bps early this week.
Israel launched an attack on Iran on Friday, sources said, in the latest exchange between the two adversaries. But Tehran played down the incident - a response that appeared gauged towards averting region-wide war.
"What is interesting is that there has been no strong statement of retaliation from Iran," said Mohit Kumar, chief economist, Europe, at Jefferies.
"Given (it's) Friday, we would see position unwinds as investors try to go home neutral into the weekend," he added.
German 10-year bond yields, the benchmark for the euro zone, were up 1.5 bps at 2.51%, after hitting 2.523%, their highest since Nov. 28.
They were set to end the week 15 bps higher, the biggest rise since mid-March.
Euro area borrowing costs played catch up with last week's rise in U.S. rates. Bund yields have risen by 15 bps this week, after dropping 2.5 bps the one before, while U.S 10-year Treasury yields jumped by around 12 bps in both weeks.
Some analysts flagged risks of a more hawkish stance from the Federal Reserve and the ECB in the worst-case scenario of a broadening conflict in the Middle East, which would boost oil prices and inflation pressures.
"In a bigger conflict, our euro area economists point to the risk of a considerable delay to the cutting cycle from the ECB or even the potential of further rate hikes," said Sphia Salim, rate strategist at BofA.
The spread between U.S. 10-year Treasuries and German Bunds narrowed 4 bps to 210 bps, after touching its lowest level in nine days.
Oil slipped on Friday, after an earlier price spike of more than $3, as Iran played down reported Israeli attacks.
Beyond geopolitics, investors focused on the interest rate outlook as ECB policymakers continued to line up behind a June interest rate reduction.
In the U.S., the Federal Reserve is re-evaluating the need for any interest rate cuts this year in the face of resilient economic data and ongoing strength in the labour market.
Finance chiefs across the world are scrambling to keep pace with the Fed's rapid resetting of rate-cut expectations.
According to a majority of 100 economists polled by Reuters, the Fed will wait until September to cut its key rate, with half of the respondents saying there will be only two cuts this year.
Germany's two-year yield, which is more sensitive to expectations for policy rates, was up 3 bps at 3.01%.
Italy's 10-year yield was 2 bps higher at 3.90%, and the gap between Italian and German Bunds narrowed 1.5 bps to 138 bps, after briefly hitting 144.9, its highest point since early March. (Reporting by Stefano Rebaudo and Joice Alves; Editing by Jane Merriman and Mark Potter)
