Data last week from Europe and the U.S. showed consumers had raised their inflation expectations, particularly for the longer term.
"The inflation expectations data from the U.S. on Friday was fairly high," said Jens Peter Sørensen, chief analyst at Danske Bank.
"Central banks will be worried about second-round effects of inflation such as higher wage claims, but if you get inflation down quickly, people will not demand such high wage increases," Sørensen added.
Germany's 10-year government bond yield rose 4 basis points (bps) to 2.304%.
The policy-sensitive two-year yield increased by 2 bps to 2.637%.
European Central Bank (ECB) policymaker Peter Kazimir said on Sunday the central bank may need to raise interest rates for longer than previously thought.
The ECB has increased its deposit rate by a combined 375 bps since the middle of last year, but the May hike of 25 bps was the smallest in the tightening cycle so far. Money market bets on tightening have held firm. The September 2023 ECB euro short-term rate forward was at 3.61%, implying expectations for a peak ECB deposit facility rate of around 3.7%, compared with 3.25% currently.
Italian bonds slightly outperformed their German counterparts after Fitch on Friday affirmed Italy's sovereign credit rating at 'BBB' with a stable outlook, when there had been an outside chance the sovereign rating faced a downgrade.
"The rating is supported by a diversified, high value-added economy," ratings agency Fitch said.
Danske Bank's Sørensen said Italy's avoidance of a downgrade should have a "positive impact" on Italian bonds. Moody's is set to update its sovereign rating for Italy on Friday.
Italy's 10-year yield was up one bp to 4.181%, pushing the closely-watched 10-year yield gap between Italian and German bonds tighter by around 1.5 bps at 186. Markets will digest increasing government bond supply this week, with issuance expected from Finland, France, Germany, Greece, Slovakia and Spain, in nominal and inflation-linked bonds.
Elsewhere, investors will monitor U.S. debt ceiling negotiations. President Joe Biden is expected to hold talks with congressional leaders on Tuesday on raising the debt ceiling.
Short-term U.S. Treasury yields have reached their highest on record as the federal government's 'X-date' when it could run out of cash to pay obligations, comes into view, with the 1-month Treasury-bill yield down 9 bps at 5.59%, after hitting 5.827% last week. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ ECB eases the pace of interest rate hikes ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting by Samuel Indyk; Editing by Barbara Lewis and Mark Potter)
