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Euro zone government bond yields rose on Monday as investors paused their bond buying after rushing into safe-haven assets amid recession fears late last week.

Analysts continued to fear recession over inflation while scaling back their expectations about future European Central Bank (ECB) interest rate rises.

Money markets were pricing in around 135 basis points of ECB rate hikes by year-end, from 140 bps last week and 155 bps the week before.

Citi analysts said a range of 1% to 1.5% for the 10-year Bund yield looked fairer than 1.5% to 2%, adding there were reasons to be uncertain.

ING analysts also said yields might have peaked recently but they argued implied volatility remained high and could still lead German borrowing costs to 2%.

Germany’s 10-year government bond yield, the bloc’s benchmark, rose 3 bps to 1.27%.

Euro zone bond yields steady as markets take stock of ECB, Fed

Trading was thinned by the US Independence Day holiday. “Further downside for short-end rates looks limited,” Commerzbank analysts said.

“Further disappointing (economic) activity data could thus turn the latest bullish steepening into a long-end flattening.

We still suggest buying Bunds into dips,“ they added. The spread between Germany’s 10-year and 2-year bond yields widened from 40 bps in mid-June to around 80 bps last week.

It was at 68.9 on Monday. Data out Monday showed the number of people registering as jobless in Spain has fallen to the lowest level since the global financial crisis hit the country in October 2008.

Italy’s 10-year government bond yield rose 5.5 bps to 3.26%, with the spread between Italian and German 10-year yields widening to 200 bps.

Investors will focus on a meeting between Italian Prime Minister Mario Draghi and the leader of the 5-Star Movement (M5S), Giuseppe Conte, to try to resolve tensions that could bring down Draghi’s 16-month-old government.

“We expect the prime minister to go a long way in his attempts to reach a compromise that would keep the M5S on board,” Unicredit analysts said. The Federal Reserve and the ECB will issue minutes from their last policy meetings on Wednesday and Thursday.

“We’ll see how central banks were thinking about this weak growth vs labour tightness dilemma, but this will be slightly dated in light of how rapidly the macro is evolving,” Deutsche Bank analysts said.

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