By Dhara Ranasinghe
LONDON (Reuters) -Germany's two-year bond yield hit its highest since 2014 on Wednesday, rising hard and fast into positive yield territory, as a fresh surge in German and Spanish inflation bolstered expectations the ECB may have to hike rates sooner rather than later to curb price pressures.
A day after rising above 0% for the first time since 2014, Germany's two-year bond yield was last up 10 basis points (bps) at 0.066% - a new high.
Across the single currency bloc, benchmark 10-year bond yields too were 7-8 bps higher on the day, as inflation numbers raised rate-hike prospects.
Spanish consumer prices rose 9.8% year-on-year in March, their fastest pace since May 1985, while German annual inflation rose above 7% to its highest level in more than 40 years in March.
"We have huge numbers for inflation from Spain and parts of Germany, which is not something people would have forecast two or three months ago," said Ludovic Colin, a senior portfolio manager at Swiss asset manager Vontobel.
"It's hard to forecast things in the short-term and that's why we have a panic in yields and it's hard to say where yields are going and when they will stop."
Bond markets across major economies have had their worst sell off in years. Two-year German bond yields are up 56 bps in March and set for this biggest monthly jump since 2008.
And while European Central Bank chief Christine Lagarde on Wednesday said food and energy prices in the bloc should stop rising, others pushed the case for higher rates.
ECB policymaker Peter Kazimir said the first rate hike could come this year, while it would be possible under the ECB's forward guidance for it to raise rates in September and December as long as it stops its bond purchases before then, fellow policymaker Robert Holzmann said.
Euro zone money markets price in almost 70 basis points of ECB tightening this year.
Chris Scicluna, head of research at Daiwa Capital Markets, said the ECB was likely to hike in 25 bps instead of 10 bps increments as it has done in the past.
"We don't see the need to move in smaller increments this time around," he said, adding: "I think there's a desire to get at least up to a zero deposit rate."
The ECB's depo rate is at -0.5%, the ECB last hiked rates in 2011.
Germany's 10-year Bund yield was 7 bps higher on the day at 0.71%, near four-year highs hit on Tuesday. Italian yields also jumped 7 bps.
U.S. bond markets were also in focus a day after the closely watched U.S. 2-year/10-year Treasury yield curve briefly inverted for the first time since September 2019 in a sign that recession risks were rising.
That spread was last at around 8 bps.