Germany's two year yield rose nearly 10 basis points (bps) in afternoon trade to 3.308% its highest since Oct. 2008.
Italy's two year yield also rose and was last up 5 bps at 3.85%.
The move up in yields came after Austrian central bank governor Holzmann, a hawkish member of the ECB's governing council, told German business daily Handelsblatt that the central bank should hike rates by 50 basis points at its March, May, June and July meetings.
That would take the deposit rate to 4.5%, well above the 4% peak rate priced in by markets, a level no other policymaker has so far advocated in public. The ECB has already raised rates to 2.5%, a 3 percentage point increase since July and essentially promised another half a percentage point increase on March 16.
Forwards on the ECB's euro short-term rate still point to a peak of around 3.9% in November 2023. A key market gauge of euro zone inflation expectations - euro 5-year by 5-year forward inflation-linked swap - hit its highest since at least 2013 at 2.6083%, before dropping to 2.54%.
In separate remarks ECB President Christine Lagarde said the flagged rate increase of 50 bps in March is now "very, very likely," but she also warned that underlying inflation could stay uncomfortably high in the coming months.
Shorter dated bonds are more sensitive to moves in interest rate expectations than their longer dated peers, and moves in 10-year bonds were less dramatic.
Germany's 10-year yield, the benchmark for the euro zone was flat on the day 2.72%, having earlier dipped as low as 2.64%.
That yield hit an 11-year top of 2.77% last week, before dipping in line with U.S. peers after Fed officials last week expressed doubt about whether recent hotter-than-expected data was a sign that higher interest rates were required. Italy's 10 year yield was 1 basis point lower at 4.53%
Some investors suggest that the recent sharp climb in yields may now be coming to an end.
"Given the (government bond) yield levels reached, the air for a further increase is becoming significantly thinner," said Florian Späte, senior bond strategist at Generali Investments.
"Since we do not see any catalyst for lower yields in the short term, we assume a sideways trend on elevated levels for the time being before particularly US yields are likely to fall again." Market focus is also shifting to the United States ahead of Federal Reserve Chair Jerome Powell's testimony to the Senate Banking, Housing and Urban Affairs Committee on Tuesday.
Investors will look for insights as to how aggressive the
U.S. central bank will be in raising interest rates, and
Powell's remarks come a few days before the FOMC blackout period
before their next meeting starts on March 11.
Analysts expect Powell to reiterate that if economic data
continues to surprise to the upside, the rate peak may need to
be higher than the 5.125% policymakers indicated in December.
We think "that the FOMC will only hike in 25 bp increments
from this point, unless startling data forces its hand to change
this path," said Mark Dowding, CIO at BlueBay Asset Management.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
ILS ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
(Reporting by Stefano Rebaudo, editing by Ed Osmond and Angus
MacSwan)
