LONDON: Euro zone government bond yields edged up on Thursday after inflation in the bloc hit 2 percent for the first time in four years last month, shooting past the European Central Bank's inflation target.
Europe's benchmark German 10-year yield hit a 10-day high ahead of the data, buttressed by expectations that the US Federal Reserve will raise interest rates later this month.
Inflation in the 19-member euro area rose to 2 percent last month, from 1.8 percent in January, increasing pressure on the ECB, which targets inflation of below but close to 2 percent, to end loose monetary policy.
Analysts said a pick-up in headline inflation had been expected after strong country data in recent days, limiting a bigger selloff in bond markets for now. German inflation soared to its highest level in four-and-a-half years in February, data on Wednesday showed.
Also, an underlying measure of euro zone inflation held steady at 0.9 percent last month, suggesting that once the oil price surge passes through the numbers, inflation will fall back down.
Still, the overall pick-up in inflation does not bode well for bond markets and is seen fuelling talk of a scaling back in ECB stimulus.
The ECB is scheduled to run its quantitative easing bond-buying scheme until at least December and has pushed interest rates deep into negative territory to try to stimulate weak growth and hitherto stubbornly low inflation.
"Psychologically, 2 percent inflation could be important and there will be more pressure building on the ECB to taper -- especially if the economy continues to grow," said KBC strategist Piet Lammens.
The ECB is scheduled to meet next on March 9.
German 10-year bond yields were up 1.5 basis point at 0.30 percent. They hit 0.31 percent earlier on Thursday, adding to Wednesday's 4 bps rise seen after policymakers suggested the Fed was worried about waiting too long to raise rates in the face of looming economic stimulus from Washington.
Fed board of governors member Lael Brainard joined the chorus of policymakers signalling a hike may come as soon as mid-March late on Wednesday.
Brainard was a key voice throughout 2015 and 2016 in warning that trouble in Europe and slower-than-expected growth in China could hurt the United States. That argument helped slow the Fed's expected pace of tightening and recent comments have served to firm expectations for a hike.
Most other euro zone bond yields were about 1 bps higher on the day.
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