By Harry Robertson
LONDON, March 1 (Reuters) - Euro zone government bond
yields hit their highest levels in more than a decade on
Wednesday, as regional German data kept fears about inflation at
the front of investors' minds.
Germany's 2-year government bond yield , which is
highly sensitive to changes in interest rate expectations, rose
to its highest since October 2008 at 3.209%, and was last up 8
basis points (bps) to 3.202%. Bond yields rise as prices fall,
and vice versa.
The yield on Germany's 10-year bond , seen as the
benchmark bond for the single-currency area, was up 8 bps to
2.711%, its highest since July 2011.
Yields rose sharply on Tuesday after data showed inflation
was higher than expected in France and Spain in February, adding
to the pressure on the European Central Bank (ECB) to keep
hiking interest rates.
On Wednesday, regional inflation data from Germany began to
trickle through, with prices in North-Rhine Westphalia, the most
populous region, rising 8.5% year-on-year in February, up from
8.3% in January.
More regional data at 10 a.m. local time (0900 GMT) will
give a fuller sense of price pressures in the euro zone's
biggest economy.
Traders have ramped up their expectations for the peak level
in ECB interest rates, predicting a high of around 3.9% by
December, according to pricing in futures markets .
They are also lowering hopes of early interest rate cuts,
having previously expected them before the year was out.
"Markets are no longer trying to figure out how high can the
Federal Reserve and the ECB go, but for how long should we
discount higher rates," said Florian Ielpo, head of macro at
Lombard Odier Asset Management.
"We are switching from a problematic of a number of rate
hikes to a problematic of duration of this higher rates
environment."
Ielpo said Tuesday's French and Spanish figures "are not
reassuring" for investors.
Italy's 2-year government bond yield hit its
highest since August 2012 on Wednesday at 3.737%, and was last
up 7 bps at 3.731%.
The Italian 10-year yield was last up 8 bps to
4.547%, not far off the two-month high of 4.575% reached on
Tuesday.
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Short-dated euro zone bond yields - 01/03 ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
(Reporting by Harry Robertson; editing by Barbara Lewis)
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