Benchmark German bonds are headed for their worst week since November's US election on Friday, as Donald Trump's first week in office fuels expectations of inflation and growth-boosting policies in the world's biggest economy.
Italy has also been badly hit in a broad debt market sell-off on fears the country is headed for early elections, adding to the political risks stalking Europe with France, the Netherlands and Germany also holding polls in 2017.
While the rout that has pushed German and other euro zone yields to around one-year highs this week ebbed on Friday, investors were left waiting for Trump's joint news conference with British Prime Minister Theresa May at the end of a busy week for the US leader.
Trump has made several business-friendly decisions since taking office last week, including signing executive orders to reduce regulatory burdens on domestic manufacturers and clearing the way for the construction of two oil pipelines.
In Europe, expectations of rebounding growth and inflation have prompted a chorus of calls from German policymakers for the ECB to wind down its monetary stimulus. The ECB is buying tens of billions of euros' worth of bonds every month in a scheme due to run until at least December, and has deeply-negative interest rates. A market gauge of long-term inflation expectations in the euro zone - the five-year, five-year forward rate - broke above 1.8 percent on Friday for the first time in more than a year, in the region of the ECB's near-2 percent target.
"Following the whirlwind first week of the Trump presidency, the pace of the impact on inflation is once again being revised," said Ryan McGrath, a bond strategist at Cantor Fitzgerald.
German 10-year yields edged down slightly to 0.46 percent on Friday, off a one-year high of 0.498 percent hit Thursday, but up 11 basis points (bps) this week in its worst run since the week ending November 11. Political outsider Trump defeated Hillary Clinton in a vote on November 8. Italian equivalents were steady at 2.24 percent, having earlier touched a 16-month high of 2.29 percent, and are up 21 bps this week in their worst run since November.
Italy's constitutional court on Wednesday threw out aspects of an electoral law approved by former prime minister Matteo Renzi but presented a reworked version that can be used immediately, raising the chance of early elections this year. Italy's largest parties - Renzi's Democratic Party (PD) and the anti-establishment 5-Star Movement - are both calling for a vote by the summer, about a year ahead of schedule. Most other euro zone yields have risen sharply this week - with those in France and Portugal hitting around one-year highs on Thursday - although they edged back a touch on Friday.
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