Euro zone government bond yields were mixed on Thursday as investors assessed the possible outcome of the Ukrainian crisis amid conflicting statements about a potential Russian invasion.
Russian-backed separatists in eastern Ukraine accused government forces of opening fire on their territory four times in the past 24 hours in a move that could fuel tension between Russia and the West.
Investors will also focus on European Central Bank speakers, including board members Isabel Schnabel and Philip Lane, looking out for any possible deviation from recent comments making a case for ending the ECB's bond-buying scheme.
Germany's 10-year government bond yield, the benchmark of the bloc, fell 0.5 basis points to 0.27%, after hitting its highest since December 2018 at 0.331% on Wednesday.
"These days are tricky because a lot will be driven by what happens on the geopolitical front," Andrew Mulliner, head of Global Aggregate Strategies at Janus Henderson, said.
German bond yields edge lower with focus on Fed
"But even without an escalation in Ukraine, we don't see 10-year Bund yields moving materially higher from their recent highs as we expect inflation pressures to fade," he added.
Italy's 10-year government bond yield rose 0.5 bps to 1.91% while the spread between Italian and German 10-year bond yields was at 163 bps.
"I believe markets will test wider levels (of the Italian-German yield spread) than the current ones if the ECB keeps pushing to tighten policy. Markets want to understand just where the backstroke is," Janus Henderson's Mulliner argued.
"I expect the yield spread to be north of 200 basis points at some point this year," he added.
Investors were digesting Federal Reserve minutes released late on Wednesday.
Fed officials last month agreed that it was time to raise interest rates, but also that any decisions would depend on a meeting-by-meeting analysis of data.
"To be fair, this (January's Fed meeting) was before the 7.5% consumer price index (CPI) print last week," Deutsche Bank analysts said. "Nevertheless, markets liked the lack of incremental hawkishness." "Assuming the Fed uses the March meeting as a rate hike focus, the May meeting could do something more specific on QT (quantitative tightening) plans," ING analysts said, arguing that the minutes didn't provide much guidance.
"The logic of waiting till July for balance sheet reduction could be to focus on consecutive hikes to get the funds rate up to the 1% area, and then commence reduction," they added.