German bond yields set for biggest daily rise since October

Updates in late European trading

By Harry Robertson and Lucy Raitano

LONDON, Feb 11 (Reuters) - German government bond yields were set for their biggest daily rise in almost four months on Tuesday as investors grappled with new U.S. tariffs, testimony from Federal Reserve chair Jerome Powell and higher energy prices.

The European Union said on Tuesday it would respond with "firm and proportionate countermeasures" after U.S. President Donald Trump's decision to impose tariffs on all steel and aluminium imports, escalating fears of a trade war. However, bond analysts said the impact of tariffs was hard to gauge and it was not obvious they were pushing up yields.

Germany's 10-year yield, the benchmark for the euro zone, was last up 7 basis points (bps) at 2.434% DE10YT=RR, the biggest daily increase since October 21. Yields rise as prices fall, and vice versa.

The rise only took Germany's 10-year bond rate to its highest in a week, however. Yields fell sharply on the back of weak data at the turn of the month, causing the German 10-year yield to fall to its lowest since the start of the year on February 5.

Jussi Hiljanen, head of European rates strategy at lender SEB, said a recent rise in U.S. bond yields could be a culprit. The size of the U.S. economy means American yields tend to set the tone for markets around the world.

"Bund (German) yields dropped quite significantly after 29 January and as (U.S.) Treasury yields have turned again higher, there seems to be spill-over to Bunds now," he said.

Bond yields rose further after Fed Chair Jerome Powell said in prepared remarks to the Senate that the central bank was in no rush to cut rates again given the economy is "strong overall". Powell's Senate testimony is the first of two days of hearings on Capitol Hill.

Italy's 10-year yield IT10YT=RR rose 9 bps to 3.539%, and the spread between Italian and German yields DE10IT10=RR widened 2 bps to 110 bps.

Germany's two-year bond yield DE2YT=RR, sensitive to European Central Bank rate expectations, was up 5 basis points at 2.082%.

Lyn Graham-Taylor, senior fixed income strategist at Rabobank, said energy prices and high levels of government bond sales may be contributing to the rise in yields.

Oil prices rose for a third day to their highest in a week, but remained well below recent highs LCOc1. Meanwhile, European natural gas prices rose to a two-year high as cold weather lifted demand TFMBMc1.

Germany, Spain, Italy and Britain were among the countries and entities raising money from bond and bill sales on Tuesday.

Italy received record demand for a single-tranche deal as it raised 13 billion euros from its second bond syndication of 2024.