LONDON: Germany's benchmark 10-year bond yield hit a one-month peak on Thursday as oil prices climbed to their highest level since late 2014, raising the prospect of upward pressure on inflation.
Oil prices jumped as US crude inventories declined and top exporter Saudi Arabia pushes for higher prices by continuing to withhold supplies.
The surge came on a Reuters report that OPEC's new price hawk Saudi Arabia would be happy for crude to rise to $80 or even $100.
Sustained higher energy prices could feed through into higher inflation, potentially speeding up a tightening of monetary policy in the euro zone.
This put upward pressure on bond yields across the bloc. Germany's 10-year bond yield jumped more than 4 basis points to around 0.58 percent and was set for its biggest 1-day jump in more than two months.
Most better-rated euro zone states saw their borrowing costs rise 3-5 bps on the day, with France's 10-year bond yield also at a one-month high of 0.805 percent. French yields were set for the biggest one-day rise since late January.
A key market gauge of long-term inflation expectations in the euro zone meanwhile rose to its highest level in five weeks, to about 1.7 percent.
"Oil has an impact on the yield segment, on Bunds, but it's still rather moderate," said DZ Bank strategist Daniel Lenk.
Italy continued to outperform, as the gap between it and Germany's borrowing costs narrowed on Thursday to its tightest since August 2016. The country has reached a political impasse in the wake of an inconclusive election, but the market has taken some solace from the fact that a populist coalition looks unlikely to be formed.
The anti-establishment 5-Star Movement on Wednesday challenged the far-right League to abandon its electoral allies by the end of the week and form a joint government, but it was unclear whether the League would agree to such a move.
Analysts said the lack of progress on a coalition between the two was reassuring to markets; both are hostile to EU budget rules and the anti-immigration League also wants to leave the euro zone.
"One driver for the spread tightening could be that investors are skeptical that there's a real chance for those parties to come together as well as an overall good spread environment," said Lenk.
The premium investors demand to hold Italian 10-year government bonds over benchmark German debt narrowed to 117 basis points.
The gap between short- and long-dated Treasuries was near its lowest in over a decade, which suggests the market anticipates the Federal Reserve will continue to raise interest rates in 2018.
The U.S 10-year Treasury yield rose to a one-month high of 2.899 percent during the European session.
Elsewhere, France and Spain sold bonds at auctions.
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