German Bund yield hits fresh 8-month high as reflation trade hits

* Euro zone periphery govt bond yields

LONDON, Feb 22 (Reuters) – Germany’s benchmark 10-year bond yield rose to a fresh eight-month high on Monday, as bets on stronger economic growth and inflation in the months ahead continued to put upward pressure on borrowing costs in the euro area.

The so-called reflation trade was again led by long-dated U.S. Treasury yields, which on Monday rose to their highest levels in around a year .

That set the tone for trade in European bond markets, with German 10-year Bund yields rising to -0.28%, a fresh eight-month high. It rose almost 12 basis points last week, the biggest weekly jump since June.

The selloff has steepened the German yield curve, with the gap between 2- and 10-year bond yields at its widest in almost a year, at around 39 bps.

“In our view this is not a buy-on-dip environment in rates, and the bear-steepening still has further to run,” analysts at Mizuho said in a note.

In perhaps a more worrying sign for policy makers, real or inflation-adjusted bond yields have also risen sharply in the past week. Germany’s 10-year inflation-linked yield on Monday rose to -1.28%, its highest since last October.

Analysts at UniCredit said the rise in real yields had gone too far.

“Even the generalized optimism on the outlook for global growth would not be enough to justify current levels of 10-year Bund real yields,” they said in a note.

Focus was now turning to central bank officials and their thoughts on the jump in borrowing costs, which could threaten to derail economies recovering from the coronavirus crisis.

European Central Bank chief Christine Lagarde is expected to speak later on Monday, while U.S. Federal Reserve Chairman Jerome Powell delivers his semi-annual testimony before Congress on Tuesday.

Most 10-year bond yields in the euro area were 2-3 basis points higher on the day. Italy’s 10-year bond yield was up 2.5 bps at 0.64%, 22 bps above record lows hit earlier this month.

Europe will decide whether to extend the suspension of its rules limiting budget deficits and debt, known as the Stability and Growth Pact, in coming weeks, the Commissioner for Economy Paolo Gentiloni meanwhile said on Monday.

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