Euro zone's benchmark Bund yield edges back up near 12-year high

"This looks to be the overarching driver of market rates right now," they added. Germany's 10-year government bond yield, the benchmark for the euro zone, rose 2.5 basis points (bps) to 2.86% on Monday. It hit 2.98%, its highest level since early July 2011, on Thursday last week when single countries, including Germany, released inflation data.

The euro zone's benchmark Bund yield edged higher on Monday to within striking distance of last Thursday's 12-year high, after a bill averting a U.S. government shutdown boosted appetite for riskier assets.

S&P futures were rising after the U.S. Congress passed a stopgap funding bill late on Saturday to avoid the federal government's fourth partial shutdown in a decade. Euro area borrowing costs had fallen on Friday after U.S. key data for August pointed to moderating inflation, following a jump the previous day to 2011 highs. The bloc's own data has shown easing consumer price dynamics. Bond prices move inversely to yields.

"With activity not collapsing, and labour markets certainly not imploding, both the Fed and the ECB will be resisting any hint of a rate cut in the coming quarters," ING analysts said in a research note. "This looks to be the overarching driver of market rates right now," they added.

Germany's 10-year government bond yield, the benchmark for the euro zone, rose 2.5 basis points (bps) to 2.86% on Monday. It hit 2.98%, its highest level since early July 2011, on Thursday last week when single countries, including Germany, released inflation data. Analysts said the European Central Bank's hawkish stance, with policymakers reiterating that rates will stay high for an extended period, weighed on long-dated bond prices.

ECB vice-president Luis de Guindos, seen as a policy dove, dismissed on Monday talk of rate cuts as premature and warned that the "last mile of disinflation is the hardest." Urgency in public investments has increased in the wake of the war in Ukraine, as countries add defence and energy security to their existing priorities.

Meanwhile, a decline in inflation cannot be taken for granted as oil prices keep rising while the outlook for wage growth and services inflation remains unclear. Such a backdrop is expected to lead markets to require an elevated term premium, driving long-dated bond yields higher.

Germany's 2-year yield, sensitive to short-term expectations for policy rates, was flat at 3.20%. In early July it hit 3.393%, its highest level since 2008. The risk premium on Italian debt remained subdued after rising when the government in Rome cut its growth forecasts for this year and next and hiked its budget deficit targets.

The spread between Italian and German 10-year yields was at 192 bps after hitting 200 bps last Friday. Citi analysts said last week that they had turned tactically neutral ahead of an issuance of Italian debt targeted at retail investors, while retaining a medium-term widening bias.

Italy will launch its second BTP Valore bond for retail investors on Monday to boost domestic holdings of its debt.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)