FRANKFURT, Aug 30 ― Euro zone government bond yields rose today as the first inflation data from German states fuelled expectations the European Central Bank (ECB) tightening cycle won't be over soon.

In North Rhine Westphalia (NRW), Germany's most populous state, consumer prices in August rose 0.5 per cent month-on-month and 5.9 per cent year-on-year.

Christoph Rieger, head of rates research at Commerzbank, said that was “above expectations for German CPI”.

Spain's consumer prices rose 2.6 per cent year-on-year in August, while core inflation, which strips out volatile fresh food and energy prices, was up 6.1 per cent year-on-year, down from 6.2 per cent in the period through July.

Investors await data from other German states. Inflation figures from Italy, France and the euro area are due on Thursday.

Some analysts expect the ECB won't raise rates in September and could pause the tightening cycle with the deposit facility rate at the current level of 3.75 per cent.

However, money markets raised their bets on a rate increase after the NRW data, pricing in a 60 per cent chance of a 25 basis points (bps) hike in September from 50 per cent the day before.

They also nudged up expectations for where the ECB rate will peak to 3.98 per cent by year-end from 3.95 per cent the day before.

Robert Holzmann, seen as a hawk on the ECB's governing council, said on Monday he saw a case for raising rates further at the next policy meeting if there are no big surprises in inflation data before then.

Germany's 10-year government bond yield, the euro area's benchmark, rose 5 bps to 2.56 per cent, still in the middle of its recent range.

According to Citi analysts, “Bund technicals suggest that a breakout might be imminent, but don't say anything about the direction of the next move.”

Germany's 2-year yields, most sensitive to changes in policy rates, rose 6.5 bps to 3.10 per cent.

The German yield curve deepened its inversion with the gap between 2-year and 10-year yields hitting a fresh 2-1/2-week low at -54.6 bps.

An inverted curve is usually a reliable indicator of a future recession and means markets are pricing events that would trigger central bank rate cuts.

Investors also await crucial data from the US after a fall in US job openings drove yields lower on both sides of the Atlantic yesterday.

Initial jobless claims data is due on Thursday, while non-farm payrolls will be released on Friday.

Italy's 10-year government bond yields, the benchmark for the euro area's periphery, dropped 5 bps to 4.21 per cent.

The spread between Italian and German 10-year yields ― a gauge of investor sentiment towards the euro zone's more indebted countries ― was at 164 bps after trading between 158 bps and 180 bps during the summer. ― Reuters