LONDON, Dec 27 (Reuters) - German government bond yields were higher on Tuesday, with the 2-year yield hitting a 14-year high, extending gains made after the European Central Bank (ECB) struck a more hawkish tone at its meeting earlier this month.
The ECB eased the pace of interest rate hikes at the December meeting, raising its key interest rate by 50 basis points (bps), but signalled more significant tightening ahead as it attempts to bring sky-high inflation back to target.
Dutch ECB policymaker Klaas Knot signalled on Monday when markets were closed that the ECB will keep raising rates in the months ahead, saying the risk of the central bank doing too little to fight inflation is still the bigger risk.
The yield on Germany's 2-year government bond, which is most sensitive to changes in interest rate expectations, was last up 4 bps at 2.682%. It hit 2.696% in early trade, its highest level since October 2008.
Germany's 10-year yield, the benchmark for the euro area, was last up 8 bps at 2.476%. It hit its highest level since 2011 in October at 2.532%.
Jan von Gerich, chief analyst at Nordea, noted hawkish speeches from ECB members over the holiday period for Tuesday's upwards move in yields.
"The rhetoric that has come in from the ECB over the holidays has been mainly on the hawkish side," von Gerich said, citing Dutch policymaker Knot.
"That combined with low volumes and many people on holiday still is enough to keep the market going that way," von Gerich added.
Money markets are fully pricing in a 25 basis point rate hike from the ECB at its next meeting with around a 90% chance of a 50 basis point hike, according to Refinitiv data.
Heavily indebted countries in the euro area, such as Italy, saw borrowing costs surge after the ECB's hawkish tone.
Italy's 10-year government bond yield was last up 4 bps to 4.606%. It has risen 66 bps so far this month, on track for its biggest monthly rise since August.
The gap between Italian and German 10-year yields widened by 2 bps to around 213 bps, although still down from a near eight-week peak of 222 bps reached last week.
Meanwhile, eyes were on China after the country's National Health Commission said it will stop requiring inbound travellers to go into quarantine starting from Jan. 8, in a further easing of some of the most strict global COVID regulations.
With little data on the calendar in Europe, focus was likely to turn to U.S. trade and home prices data due at 1330 GMT and 1400 GMT, respectively. (Reporting by Samuel Indyk; Editing by Muralikumar Anantharaman)
