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UPDATE 2-Euro zone government bond yields jump amid inflation fears

·2 min read

(Recasts)

By Stefano Rebaudo

June 27 (Reuters) - Euro zone bond yields jumped on Monday amid fears about surging inflation, with investors trimming their positions after buying aggressively last week.

Safe-haven German bond yields fell more than 20 bps last week in their third-biggest weekly drop this year as limp German Ifo data raised fears of a sharp economic slowdown as traders bought debt aggressively after weeks of selling.

Some analysts noted that markets were also unwinding some of the aggressive rate hike bets from the European Central Bank for the remainder of the year.

But bonds remain vulnerable to further selling pressure as central banks showed a 'whatever it takes' approach to tame inflation despite the growing risk of economic recession.

"Sure, there are worries about consumer price numbers. But investors are also rebalancing their portfolios by selling bonds after aggressively covering short positions late last week," said Massimiliano Maxia, senior fixed income specialist at Allianz Global Investors.

Leaders of the Group of Seven wealthy democracies on Monday pledged to stand with Ukraine "for as long as it takes" by cranking up sanctions on Russia and backing security commitments for Kyiv in a post-war settlement.

Oil prices edged higher on Monday in a volatile session as investors watched for any moves against Russian oil and gas exports.

Germany's 10-year government bond yield, the benchmark of the bloc, rose 10 basis points (bps) to 1.55%.

A key market gauge of the euro zone's long-term inflation expectations hit a fresh 2-week high at 2.22%.

Italy's 10-year government bond yield rose 8 bps to 3.637%, with the spread between Italian and German 10-year yields flat at around 210 bps.

Analysts still have mixed views about the future path of ECB monetary tightening.

"A likely new record of inflation at 8.4% degrades the latest ECB projections which foresaw a decline in inflation," Commerzbank said in a research note.

The euro area's Harmonised index of consumer prices (HICP) will be released later this week.

"The balance of risk is for the recent highs of 3.48% and 1.77% for 10Y Treasuries and Bund yields respectively not to be revisited any time soon," ING analysts said.

"The ECB has yet to embark on its tightening programme and should crank up the hawkish pressure at its Sintra forum this week," they added.

Several European Central Bank policymakers, including President Christine Lagarde, will speak at the ECB Forum on Central Banking in Sintra, Portugal, starting late on Monday.

"If central bankers reiterate fears that monetary policy might become too tight due to inflation-fighting and will sharply increase the risk of a recession, longer-term nominal yields might see a repetition of the positive performance from last week," Unicredit analysts said.

(Reporting by Stefano Rebaudo, Editing by William Maclean and Bernadette Baum) ;))