Bond yields on the rise in Europe

Europeans are finding there’s a price to pay for surprisingly robust economic growth: rising interest rates.

Long-term bond yields in Germany and France rose to their highest level in nearly three years Wednesday, amid more signs of strength in the Continent’s economy. British bond yields also surged.

Higher bond yields in Europe may be putting upward pressure on U.S. bond yields, which also have been rising in recent weeks.

In Germany, the annualized yield on 10-year government bonds jumped to 4.38% on Wednesday from 4.34% on Tuesday. The yield has surged from 3.88% in mid-March and now is the highest since June 2004.

Ten-year French government bond yields hit 4.41% on Wednesday, up from 4.38% on Tuesday and 3.93% in mid-March.

By contrast, the yield on the 10-year U.S. Treasury note ended at 4.85% on Wednesday, up from 4.83% on Tuesday. Although the 10-year T-note is up from 4.49% in early March, it is well below its recent peak of 5.25% in mid-2006.

Long-term interest rates have declined in the U.S. as the domestic economy has slowed.

It’s a different story in Europe. On Wednesday, a government report showed Italian retail sales rose in March, exceeding economists’ forecasts.

Reports on Tuesday showed German investor and Italian consumer confidence rose by more than forecast this month, a sign growth was accelerating.

A report today on German business confidence is expected to show sentiment this month at a record level.

The data may give the European Central Bank ample justification to raise its benchmark short-term rate in June, analysts said.

The bank has continued to lift rates over the last year even as the U.S. Federal Reserve has held its key rate steady.

The ECB’s rate now is 3.75%. The bank has raised the rate four times since June, in quarter-point increments.

“I still think the risk in Europe is towards yields heading higher from here,” said Richard McGuire, a fixed-income strategist at RBC Capital Markets.

Given the ease with which investors’ capital flows around the world, rising interest rates on European bonds present more competition for U.S. bonds, analysts noted.