Euro zone bond yields back near multi-year highs on inflation angst

Inflation prints from Germany and the euro zone as a whole have sent the bloc's bond yields surging this week. Wednesday's rises follow two days of hefty increases with Germany's 10-year yield, the benchmark for the bloc, now up 22 basis points (bps) this week, on course for its biggest weekly rise in about two months.

Euro zone bond yields spiked in Wednesday afternoon trading, returning to near multi-year highs as they tracked firmer U.S. Treasury yields. Investors are digesting higher-than-forecast inflation data ahead of next week's crucial European Central Bank (ECB) policy meeting. Inflation prints from Germany and the euro zone as a whole have sent the bloc's bond yields surging this week.

Wednesday's rises follow two days of hefty increases with Germany's 10-year yield, the benchmark for the bloc, now up 22 basis points (bps) this week, on course for its biggest weekly rise in about two months. A late afternoon spike saw Germany's 10-year yield rise 5 bps to 1.165% at 1504 GMT, nearing the highest since 2014 touched in early May at 1.189%.

Its two-year yield, sensitive to interest rate expectations, was at 0.537%, having touched its highest level since 2011 . Italy's 10-year yield was last at 3.167%, extending a rise of 23 bps over Monday and Tuesday.

The Bank of Canada opened the door to a more aggressive pace of monetary policy tightening on Wednesday, saying it was prepared to act "more forcefully" if needed to tame inflation, even as it went ahead with a historic second consecutive 50-bps increase. "The fact that the Bank of Canada is being clear that it is being more aggressive and will continue to be so, shifts us away from the hints of reduced hawkishness we saw from the Fed last week," said Chris Scicluna, head of economic research at Daiwa Capital Markets.

While money markets have held onto pricing a roughly 40% chance of a 50 bps rate hike from the ECB in July, they have moved to pricing in nearly 120 bps of hikes by year-end. That compares to 110 bps last week, following comments from hawkish ECB policymaker Peter Kazimir that he would favour a 50 bps hike in September after 25 bps in July.

As the ECB is expected to hike in 25 bps increments, that increase signals that investors are pricing in a growing probability the ECB might deliver a 50 bps hike at one of its meetings this year. Focus is on upcoming speeches by ECB president Christine Lagarde, board member Fabio Panetta and chief economist Philip Lane for any further clues on the policy outlook before the bank enters its self-imposed blackout period ahead of its policy meeting next Thursday.

In the primary market, Germany raised 4 billion euros from the reopening of its 30-year green bond through a syndicated debt sale.