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UPDATE 2-Euro zone yields spike as U.S. treasuries sell off

Julien Ponthus and Yoruk Bahceli
·3 min read

* U.S. 10-year yield rises to 1 year high

* German 10-year yields at March 2020 levels

* French, Austrian 10-year yields turn positive

* Bond yields rise despite ECB speakers (Recasts, adds details, updates prices)

By Julien Ponthus and Yoruk Bahceli

LONDON/AMSTERDAM, Feb 25 (Reuters) - Euro zone bond yields spiked to levels unseen for nearly a year on Thursday despite the European Central Bank saying it was closely watching their rise, as inflation fears continued to fuel a sell-off in U.S. Treasuries.

German 10-year yields, the region's benchmark, are set for their biggest monthly gain since January 2013, and at 1540 GMT had reached -0.221%, a high not matched since the COVID-19 market crash last March.

French and Austrian 10-year yields also passed a big milestone, both turning positive for the first time since June.

Over on Wall Street, the U.S. 10-year yield was up close to 10 basis points at 1.4871%, its highest level in a year as traders anticipating rising inflation accelerated the bond sell-off.

The rise in bond yields, initially spurred on by fiscal stimulus hopes in the United States, has spilled over into the euro area.

Yet rising yields currently seem less justified in the euro zone, which has a weaker economic outlook and arguably needs to keep borrowing costs lower for longer to secure its economic recovery.

VERBAL INTERVENTIONS

Verbal interventions by ECB chief Christine Lagarde on Monday and other policymakers on Thursday have failed to stem the rise in yields this week.

The European Central Bank will fight any big increase in real or inflation-adjusted interest rates as it could choke off the bloc's economic recovery, ECB board member Isabel Schnabel told Latvian news agency LETA before markets opened.

ECB chief economist Philip Lane followed, saying the bank was keeping a keen eye on the evolution of longer-term nominal bond yields, adding that it would need to keep providing ample monetary accommodation for an extended period.

He also said the bank's monetary policy measures could help preserve the overnight index swap curve and GDP-weighted sovereign bond yield curve -- the two key yield curves, according to Lane -- in the bloc at favourable levels.

Piet Haines Christiansen, chief strategist at Danske Bank, said the fact that Lane, seen as one of the most dovish poilcymakers, only reiterated Lagarde's message without going further was disappointing.

"You can only talk so much," he said, adding that he expected the ECB to increase its weekly bond purchases.

Italian 10-year yields, one of the biggest beneficiaries of loose ECB policy, rose to their highest since October last year with a high of 0.826% in afternoon trading.

The pressure of rising yields on Italy's bond market became evident in its sale of a new five-year bond, where its borrowing costs rose to their highest since October. (Reporting by Julien Ponthus and Yoruk Bahceli, Editing by Gareth Jones)