European bonds may perform worse than notes in coming days on concern growth isn't slowing enough to subdue inflation, inhibiting the European Central Bank from cutting benchmark interest rates.
"We see domestic demand still robust," and "inflation likely to peak by midyear," said Armin Kurt, who manages 500 million euros (US$431 million) at Dresdner Bank Luxembourg.
"We're underweight" bonds maturing in five to 10 years, favoring shorter-dated securities instead, he said.
Benchmark 10-year German bund yields advanced 2 basis points Friday and 12 basis points in the week to a six-month high of 5.2 percent. That's their biggest weekly climb since the week ended April 13. The two-year note erased gains posted earlier in the week, with the yield rising 2 basis points to 4.38 percent Friday to end the week little changed.
The July interest rate futures contract rate is 4.42 percent, close enough to the 4.56 percent three-month money-market rate to suggest few traders anticipate a rate cut by midyear.
Bonds with longer maturities fell after reports showed German and Italian inflation picked up pace this month, and French consumer prices accelerated in April.
The Italian government will release a report on May inflation for the entire country on Tuesday, and France and Spain will publish figures on producer prices in April next week.
Investors are concerned the ECB, which kept its key interest rate at 4.5 percent Wednesday, may not lower borrowing costs as much as expected until inflation slows. The yearly rate of price gains has exceeded the central bank's 2 percent maximum level every month since June 2000.
Still, the central bank also targets money supply as a guide to setting monetary policy, with figures for April slated for release by the end of next week.
Two-year note yields surged 15 basis points after the most recent report showed a growth rate of 5 percent, outstripping the bank's 4.5 percent target.
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