By Amanda Cooper
LONDON (Reuters) - Euro zone bond yields rose on Friday, as fixed-income investors took profit on an earlier rally in prices, after U.S. data overshadowed a warning of rising recession risks in the single currency bloc.
U.S. retail sales figures and a measure of consumer perceptions about current economic conditions helped reinforce the view that the Federal Reserve is likely to keep raising interest rates aggressively to contain inflation.
Government bonds, including euro zone debt, came under pressure, reversing previous price gains.
Yields fell earlier in the day after European Central Bank (ECB) Vice President Luis de Guindos said the bank was prepared for a possible technical recession paired with high inflation.
"The ECB for now will just sound more optimistic than it ought to be about the economy and will move on rates, but it will probably be able to stop earlier than current forecasts imply," Berenberg economist Kallum Pickering said.
An additional note of caution seeped in from the gilts market, where prices seesawed after British Prime Minister Liz Truss fired her finance minister and announced her government would back down on parts of a multibillion-pound raft of tax cuts that has rattled markets.
German 10-year yields were last flat on the day around 2.3%, having touched an intraday low of 2.137%, while two-year yields were up 2 basis points at 1.927%.
Ten-year Bund yields rose to 2.432% on Wednesday, their highest since August 2011.
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"Bond yields are close to their peak," said Joost van Leenders, senior investment strategist at Van Lanschot Kempen.
"We think there are no reasons for significant rises as we expect the ECB to pause its tightening path next year due to a weak economy," he added.
Mizuho rate strategists reckoned that further inflation prints are needed before confirming a rise of the neutral rate - the interest rate that supports the economy at full employment while stabilising inflation.
Analysts have flagged some concerns about supply in government bond markets, given that euro zone countries are expected to increase public spending to mitigate the impact of surging energy prices.
Bank of America (NYSE:BAC) expects euro zone net government bond supply to rise close to a record high of 400 billion euros next year.
Earlier this month, ECB policymakers discussed a detailed timeline for running down the central bank's 3.3 trillion euro ($3.2 trillion) bond portfolio sometime in the second quarter of 2023, sources told Reuters this week.
($1 = 1.0253 euros)