By Stefano Rebaudo and Alun John
(Reuters) -The German yield curve was at its most inverted level since 1992 on Tuesday with yields at the rate-sensitive short end of the curve rising more than at the long end.
Germany's 2-year government bond yield, most sensitive to expectations for policy rates, rose nearly 10 basis points (bps) to 3.24%. Last Friday, it hit 3.282%, its highest level since March 9.
Germany's 10-year yield, the bloc's benchmark, rose less, up 6 bps at 2.36%, leaving the gap between the two at -88.3 basis points, its most inverted since September 1992.
The rise in yields in the European afternoon mirrored a move higher in U.S. Treasury yields after U.S. data came in better than expected, suggesting the Federal Reserve may have to keep interest rates elevated for longer to slow the economy and bring inflation back towards target.
Earlier in the day ECB President Christine Lagarde on Tuesday outlined a lengthy fight against price growth that must dampen demand and force firms to curb prices.
It was Lagarde's first public speech following the weak PMI and Ifo data which added to doubts about the health of the bloc's economy.
Money markets still bet that the deposit facility rate would peak around 4%.
"Markets have priced two more rate hikes after the ECB's last policy meeting; I think they need more data to change their view," said Massimiliano Maxia, senior fixed income specialist at Allianz (ETR:ALVG) Global Investors.
Italy's 10-year government bond yield rose 5 bps to bps to 3.99%.
The spread between Italian and German 10-year yields, a gauge of confidence towards the euro area's most indebted countries, was a touch tighter at 161 bps. It was around 220 bps at the end of last year.
Investment funds have been piling back into fixed-income assets to lock in the higher returns on offer, with the euro zone's peripheral bonds in the spotlight as they deliver enticing yields while benefiting from an ECB backstop – the Transmission Protection Instrument - to avoid risks of disorderly bond sell-offs.
Greece's bonds outperformed their peers after Kyriakos Mitsotakis' centre-right New Democracy party got 158 seats in the 300-seat parliament in the repeat election on Sunday, well ahead of the 48 secured by leftist Syriza.
Greece's 10-year government bond yield rose less than peers, up 2 bps at 3.59%.
The yield gap between Greek and German 10-year yields was 116 bps after last week hitting its lowest since October 2021, below 110 bps. The Greek-Spanish yield spread on Friday hit 25 bps, its lowest level since 2008.