By Dhara Ranasinghe and Abhinav Ramnarayan
LONDON (Reuters) - German government bond yields hit two-week highs on Thursday, leading top-rated bond yields in the euro area higher, a day after hawkish comments from top ECB policy makers turned investor focus to a looming central bank meeting.
More than 13 billion euros of new bond supply from France and Spain added to upward pressure on yields, which rose 3-4 basis points across much of the bloc.
The ECB remained in focus after ECB chief economist Peter Praet said on Wednesday the central bank would next week debate whether to gradually unwind bond purchases.
That came as a surprise to markets, as last week's rout in Italian bonds, alongside softer data, had cast some doubt on whether the ECB would signal any policy shift so soon.
"Faced with the Italian mini political crisis in May, the thinking was the ECB would postpone any communication on ending bond purchases until after the summer months," said KBC rate strategist Mathias van der Jeugt.
"But talk that the ECB will use next week's meeting to discuss ending bond buys means that, from markets' point of view, the ECB is back on the radar."
In Germany, the euro zone's benchmark issuer, 10-year bond yields rose more than five bp to 0.517 percent (DE10YT=RR) - a two-week high, before pulling back to 0.50 percent in late trade.
Still, the yield has risen 13 basis points over the last two days -- the biggest two-day jump since late 2016.
France's borrowing costs (FR10YT=RR) rose to a three-week high at 0.86 percent.
Indeed, upward pressure on bond yields remained even as data showed German industrial orders had plunged due to weak demand from domestic and euro zone clients in April, posting their fourth straight drop on the month.
"Bond markets had perhaps thought there was a growing chance of this process being delayed," David Page, senior economist at AXA Investment Management, told Reuters' Global Markets Forum, referring to the debate on ending quantitative easing.
"The ECB message yesterday was that this was not the case."
France meanwhile sold nine billion euros of bonds through an auction, including a new 10-year issue, while Spain sold 4.5 billion euros of debt.
Thursday's core euro zone bond yields were well above troughs hit last week when German 10-year yields dropped as low as 0.19 percent and French 10-year yields dipped to 0.70 percent due to political uncertainty in Italy.
The threat of a new election -- seen by some as a proxy referendum on Italy's membership of the euro zone -- has been averted, at least for now.
That has calmed markets to some degree, though trade in Italian government bonds remained volatile. Italy's 10-year bond yield was last up around five bps at 2.98 percent (IT10YT=RR), having traded lower earlier in the session.