Eurozone sovereign bond yields jumped while investors raised expectations for a European Central Bank rate hike on Thursday, a day after minutes from the Federal Reserve's most recent meeting hinted at faster-than-expected rate hikes in the US.
The 10-year bond yield in Italy rose 5 basis points to 1.295% on the day, the highest level since July 2020.
The majority of the currency bloc's 10-year bond yields were up 3 basis points on the day and trading at multi-month highs. This reflected a wider sell-off in global bond markets, which was driven by US Treasuries.
The minutes of the Fed's December meeting, released on Wednesday, suggested that rates could be raised as soon as March, when analysts had predicted May or June.
Some participants also said it would be time to start shrinking the central bank's balance sheet, highlighting a major shift in policymakers' tone in recent months as inflation remained persistently high.
ING senior rates strategist Antoine Bouvet stated, "the discussion regarding quantitative tightening in the minutes is highly significant. First and foremost, it demonstrates the Fed's significant shift in tone as they consider a more aggressive balance sheet reduction in tandem with hikes."
Fed funds futures suggest a nearly 80% chance of a 0.25% increase at the March Fed meeting, with rates around 0.80% by the end of the year. The increased likelihood of a rate hike in the US spilled over into European markets.
A 10 basis point rate hike was nearly fully priced into money market futures tied to the ECB's October meeting. Markets also expect 15 basis points of tightening by December, compared to roughly 13 basis points on Wednesday.