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LONDON: Germany’s two-year bond yield shot up to an eight-year high on Thursday and selling gripped euro zone bond markets as European Central Bank vice-president Luis de Guindos backed the end of bond purchases in July, raising prospects of an interest rate hike soon.

Two-year bond yields in France and Italy rose 12 and 9 basis points respectively. Italy’s 10-year bond yield rose to its highest since March 2020 and borrowing costs across the bloc headed back towards multi-year highs.

Money markets, which had eased rate hike bets following last Thursday’s ECB meeting, were pricing in over 75 basis points of tightening - the equivalent of three 25 bps ECB rate hikes - by year-end.

The ECB should end its stimulus programme in July and could raise rates that same month, in September or later, de Guindos said in an interview published on Thursday.

He joins a growing number of ECB policymakers, including Bundesbank President Joachim Nagel, in calling for an early end to ECB’s asset purchases.

Belgian central bank Governor Pierre Wunsch said policy rates could turn positive this year, Bloomberg reported on Thursday.

“Over the last two days we have heard from typical hawks but today we are hearing from middle-ground officials like de Guindos,” said Peter Schaffrik, global macro strategist at RBC Capital Markets.

“The hawks are now closer to the mark on the feeling on the (ECB) Governing Council, which is why bonds are selling off.” Germany’s two-year bond yield rose to as high as 0.186%, its highest since early 2014.

German 10-year Bund yields also headed back towards recent multi-year highs, up 6.5 bps on the day at 0.93%. The yield is up almost 38 bps this month and has risen for five straight months.

Italian 10-year bond yields rose to 2.6%, marking their highest level since March 2020 when the COVID-19 outbreak roiled markets.

While European and US sovereign bond yields fell on Wednesday as recent heavy selling appeared to entice some buyers back into beaten-down bond markets, the upward pull on yields appeared too strong to resist.

US and British bond yields were also higher on Thursday.

“The ECB rhetoric we’re seeing suggests they feel like they need to do something and that the inflation outlook has deteriorated even since their last meeting,” said Rabobank senior rates strategist Lyn Graham-Taylor.

A key market gauge of long-term euro zone inflation expectations rose to as high as 2.47%. That puts it at a new decade high, according to ECB data.

The gap between French and German 10-year bond yields meanwhile was at its tightest in over two weeks, at around 44 bps, after French President Emmanuel Macron cleared a major hurdle ahead of Sunday’s runoff election with a combative TV debate performance against far-right candidate Marine Le Pen.

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