LONDON- European government bond yields rose by around 5 basis points on Tuesday, resuming their upward trajectory, even after the European Central Bank signalled discomfort with the recent surge in yields.
ECB President Christine Lagarde said on Monday the central bank was "closely monitoring" rising borrowing costs - a comment that knocked Germany's 10-year Bund yield off its eight-month high. The French and Italian benchmark yields also dropped.
But yields recovered on Tuesday and carried on rising, with Germany's 10-year yield heading back towards the previous session's highs.
Borrowing costs across the euro zone have risen sharply this month as the prospect of more U.S. fiscal stimulus boosted hopes for a faster economic recovery globally.
The market is nervous and has not yet found equilibrium, said Commerzbank rates strategist Christoph Rieger.
"As bearish volatility persists, there are very few big hands willing to take the other side," he said.
The ECB’s strategy "is not to burn too much cash trying to lean against the wind – rather to intervene verbally," he said, citing lower levels of ECB bond-buying.
At 1240 GMT, Germany's benchmark 10-year Bund was up 4 bps at -0.306%, having risen as high as -0.294% earlier in the session. Before Lagarde's comments on Monday, it had climbed to an eight-month high of -0.278%.
The French and Italian 10-year yields also rose by around 5 bps, heading back towards their recent highs.
Market attention is focusing on the United States, where Federal Reserve Chair Jerome Powell is due to testify in Congress later in the session. Investors will be watching for any change in the central bank's dovish outlook.
Commerzbank's Rieger said that he did not expect Powell to address the recent rise in yields in his prepared comments, but that it could be addressed during the discussion.
The gap between yields on two- and 10-year Treasury notes, which is seen as an indicator of economic expectations, hit its highest since 2017 on Monday, at 128.37 bps, but had dipped to 125.1 bps by 1244 GMT on Tuesday.
"While we think price pressures may spike in the near term as pent-up demand meets constrained supply, we believe fears about a persistent rise in inflation are likely to prove overdone," UBS said in a note. "With this environment in mind, we think investors should be prepared for inflation concerns to persist, which could trigger bouts of volatility."
(Reporting by Elizabeth Howcroft, editing by Larry King) ((Elizabeth.Howcroft@thomsonreuters.com; +44 02075427104;))