Euro zone bond yields extend rise after hawkish central bank signals

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LONDON, Sept 24 (Reuters) - A surge in government bond yields continued in early trading on Friday, with Germany's benchmark yield hitting its highest since early July, carrying on Thursday's sell-off after a series of hawkish signals from major central banks.

The German 10-year yield had its biggest jump since February on Thursday, after Norway's central bank became the first major central bank to tighten policy following the COVID-19 crisis and the Bank of England said that the case for higher interest rates "appeared to have strengthened."

"A week of central bank action has shown us that policymakers are ready to move towards reining in on loose monetary policies introduced during the pandemic," wrote ING analysts in a note to clients.

Expectations of tighter central bank policy usually prompts investors to sell government bonds, meaning their prices go down and yields go up.

At 0736 GMT, Germany's benchmark 10-year government bond yield was up 3 basis points at -0.23%, its highest since July 6 .

Italy's 10-year yield was up 5 bps at 0.7765%, its highest since July 9.

The UK's gilt yields extended their surge from the previous session, with the 10-year yield up 5 bps at 0.955%, its highest since March 2020. The 2-year and 5-year yields also were at their highest since March 2020 .

The U.S. 10-year Treasury yield crossed the 1.4% level for the first time since mid-July on Thursday, then hit 1.452% during Asian trading hours. It was up 2 bps at 1.4337% in early European trading.

"The move in US rates is coming from the belly of the curve; its been becoming cheaper and that's a classic bearish construction," ING said.

"It's what you would expect to see happen as a curve begins to position for a future rate hike, but not an imminent one."

The U.S. Federal Reserve had a hawkish tilt at its meeting on Wednesday, saying it would likely begin reducing its monthly bond-buying soon.

Sources also said that several European Central Bank policymakers expect higher inflation and see a case for ending its emergency bond-buying scheme in March.

But the ECB is still seen as more dovish than its peers. ECB President Christine Lagarde said in an interview aired on Friday that many of the drivers of a recent spike in euro zone inflation are temporary and due to fade in the next year.

Investors will also be watching the German federal election on Sunday. (Reporting by Elizabeth Howcroft; Editing by Hugh Lawson)

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