LONDON, Feb 26 (Reuters) - Euro zone government bond yields stabilised on Friday after this week’s dramatic selloff, although Germany’s benchmark yield was still headed for its biggest monthly jump since 2016 as rising inflation expectations triggered selling of safe-haven debt.
The moves in euro zone yields early on Friday were more limited than in recent volatile days, however, and yields on U.S. Treasuries -- which have led the selloff -- dipped barely 4 basis points to 1.477% after hitting a more than one-year high on Thursday.
The rise in government bond yields, initially spurred on by fiscal stimulus hopes in the United States and a post-pandemic economic rebound that could fuel inflation, has spilled over into the euro area.
Policymakers have sought to dispel fears that they would tighten policy any time soon. The European Central Bank said this week it was closely watching the rise in yields.
Germany’s 10-year yields, the region’s benchmark, are set for their biggest monthly gain since 2016 with a whopping 27 basis point rise as of 0755 GMT.
On Friday, they rose to as high as -0.203%, a level not matched since the COVID-19 market crash last March, before trading down 2 basis points at -0.255%.
French and Austrian 10-year yields passed a big milestone on Thursday, both turning positive for the first time since June ,. They both fell around 2 basis points in early Friday trading but were still just in positive territory.
Investors and analysts said the bonds selloff, which has surprised many, resembled the so-called “taper tantrum” of 2013 when hints the U.S. Federal Reserve might slow the money-printing presses triggered an exodus out of bonds.
“The bond market just entered crisis mode,” said analysts at Societe Generale, noting a 25 basis point intraday move in U.S. Treasury yields.
“If markets fail to stabilise, central banks may have to step in, as a fast move in rates could disrupt financial conditions. With a clear medium-term trend towards higher rates, it makes little sense to attempt to catch a falling knife.”
Rising yields currently seem less justified in the euro zone, which has a weaker economic outlook, a more depressed inflation outlook and the region arguably needs to keep borrowing costs lower for longer to secure its economic recovery.
Southern European government bond yields, which have also risen rapidly as investors exited assets seen as riskier than core euro zone markets, fell 1-2 basis points on Friday.
The Italian 10-year yield stood at 0.794%, unchanged on the day, after earlier reaching as high as 0.848%, its highest since Oct. 1.
Many analysts said that with U.S. inflation-adjusted rates still negative, the rise in bond yields in the United States has further to run. By contrast, the rise in the euro zone made little sense.
“The situation in the Eurozone stands out for more than just its low vaccination drive. The ECB, unlike the Fed, has been actively trying to manage interest rates, or at least to slow the pace of rise,” ING strategists said in a note.
“We suspect intervention is imminent, or perhaps we are letting our hopes speak.”
(Editing by Jane Merriman)