German yields edge higher on hawkish ECB comments

The data adds to recession fears after a preliminary reading of a purchasing managers survey on Friday showed a contraction in business activity in both manufacturing and services in Germany. "With central bank rhetoric tilted towards the inflation-fighting mantra but business and consumer sentiment deteriorating by the day, high volatility is likely to stay," UniCredit analysts said in a note.

German government bond yields edged higher from their lowest level since May after European Central Bank officials affirmed their commitment to bring inflation back down towards their 2.0% target. ECB President Christine Lagarde said over the weekend the central bank would raise interest rates for as long as necessary to bring inflation down, adding that the ECB's decision at the September meeting would depend on data in the interim.

ECB governing council member Martins Kazaks said the central bank might not be done with big interest rate rises, adding that the rate increase in September needed to be "quite significant". The ECB raised its benchmark deposit rate by 50 basis points to zero percent on Thursday, its first hike in 11 years as it joined global peers in jacking up borrowing costs.

Money markets currently price in around a 65% chance of another 50 basis point hike at the September gathering and a further 107 basis points of tightening by year end. Yields on benchmark 10-year German government debt rose 3 basis points to 1.042%, after Friday saw the biggest one-day fall since March.

German two-year yields rose almost 5.5 bps to 0.439%, following Friday's 26 basis point drop, the biggest one-day fall in two-year yields since 2005. "You expect some consolidation after a move that large," said Peter McCallum, rates strategist at Mizuho, who highlighted today's German Ifo survey and U.S. manufacturing gauges as data points to watch on Monday.

The latest Ifo survey showed German business morale had fallen more than expected in July as high energy prices and the threat of gas shortages weighed. Ifo economist Klaus Wohlrabe said a recession is knocking at Germany's door. The data adds to recession fears after a preliminary reading of a purchasing managers survey on Friday showed a contraction in business activity in both manufacturing and services in Germany.

"With central bank rhetoric tilted towards the inflation-fighting mantra but business and consumer sentiment deteriorating by the day, high volatility is likely to stay," UniCredit analysts said in a note. They added that the macro environment pointed towards a further flattening of the euro-area curve.

Elsewhere, Italian yields were steady, keeping the closely watched spread between Italian and German 10-year yields at around 238 bps, below Friday's widest level of around 247 bps.

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