Euro zone bonds steady after sharp selloff on inflation fears

By Stefano Rebaudo

March 4 (Reuters) - Euro zone government bonds were mixed on Wednesday as investors took a breather after a sharp selloff earlier this week driven by fears that the war in the Middle East would fuel inflation.

Germany’s 10-year government bond yield DE10YT=RR, the euro area’s benchmark, was flat at 2.77%. It reached 2.711% on Tuesday, its highest level since February 11.

Money markets priced in a 60% chance of a rate increase in December EURESTECBM7X8=ICAP, up from a 40% chance of an easing move on Friday. They also indicated an 80% chance of a rate increase by June 2027. EURESTECBM11X12=ICAP

Germany’s 2-year yields DE2YT=RR, which are more sensitive to expectations for policy rates, were up 0.5 basis points (bps) at 2.18%.

Data showed on Tuesday euro area consumer prices jumped to 1.9% from 1.7% in February, outpacing expectations for 1.7%.

U.S. Treasury yields rose in early London trading, with benchmark 10-year US10YT=RR up 2 bps at 4.08%, after edging up the day before, as the Iran war continued to push oil prices higher.

Italy’s 10-year government bond yields IT10YT=RR rose 2 bps to 3.52%. The gap versus Bunds was at 72 bps from 61 bps late on Friday; it fell to 53.50 bps in mid-January, its lowest level since August 2008.