Euro zone bond yields hit 2-week high on renewed inflation fears

"Higher inflation expectations from the ECB survey and extension of oil production cuts from Saudi and Russia added to the bearish pressure," said Mohit Kumar, interest rate strategist at Jefferies. Analysts flagged a busy primary market this week as pushing up yields.

Euro zone government bond yields hit a new two-week high on Wednesday on the back of a European Central Bank (ECB) survey showing consumer expectations for inflation edged up, adding to the case for another interest rate hike. Oil prices jumped more than 1% on Tuesday amid jitters arising from supply cuts from Saudi Arabia and Russia.

U.S. Treasury yields were mostly higher, after economic data showed the services sector unexpectedly accelerated in August, with indications that inflation pressures remain firm. The ECB's Consumer Expectations Survey showed inflation expectations three years ahead rising to 2.4% in July from 2.3% in June, above the ECB's 2% target.

Money markets are pricing in an around 40% chance of a 25 basis points (bps) rate hike at the Sept. 14 meeting. They priced an around 20% chance last week. But ECB governing council member Klaas Knot told Bloomberg on Wednesday that investors betting against an interest rate increase next week are possibly underestimating the likelihood of it happening.

Germany's 10-year government bond yield, the benchmark for the euro zone, was last up 4 bps at 2.65%, its highest level since Aug. 22. "Higher inflation expectations from the ECB survey and extension of oil production cuts from Saudi and Russia added to the bearish pressure," said Mohit Kumar, interest rate strategist at Jefferies.

Analysts flagged a busy primary market this week as pushing up yields. Althea Spinozzi, senior fixed-income strategist at Saxo, said the U.S. 10-year Treasury yields were also driven higher this week by nearly $37 billion in corporate bond issues.

Investors have been avoiding increasing their bets on a hike from the ECB as data pointed to a deteriorating economy in the euro zone. Data showed that industrial orders in Germany, the bloc's richest economy, fell more than expected in July.

Germany's IfW economic institute said the economic outlook for the year had clouded over, and it is now predicting that the economy will shrink by 0.5% instead of 0.3% previously. Italy's 10-year government bond yield, the benchmark for the euro area periphery, was up 6 bps at 4.409%, its highest level since Aug. 22.

The spread between Italian and German 10-year yields - a gauge of investor sentiment towards the euro zone's more indebted countries - was at 175 bps after reaching its widest level in more than two weeks.