Mounting inflation pressures in Europe and an improving US economy prompted bond strategists to ratchet up their US Treasury, bund and gilt yield forecasts in January, a Reuters poll showed.
European Central Bank President Jean-Claude Trichet sounded a warning at this month's policy meeting after inflation spiked in December, which in turn had a pronounced impact on bond yield forecasts from more than 50 respondents.
Compared with the last Reuters poll taken in November, forecasters expect to see a steeper yield curve this year, with the spread between two- and 10-year maturities on US, UK and German debt generally expected to widen.
"The market anticipates worsening news on inflation," said Alan Clarke at BNP Paribas. "Although interest rate hikes are some way off, particularly in the US, that will keep the 2-year yields anchored quite low. But the 10-year yields will pick up, and that will lead to steepening."
There were hefty upward revisions to the 10-year bund yield outlook after data showed eurozone consumer prices grew at an annual rate of 2.2 percent in December, above the ECB's preference its says close to, but below, 2.0 percent.
On Thursday, after completion of the polling, preliminary figures showed German annual inflation picked up slightly in January to an EU-harmonised 2.0 percent from 1.9 percent.
Strategists heaped 50 basis points onto their 10-year bund yield forecast for mid-year and 40 basis points onto the end-year compared with the last poll.
The poll now shows it yielding 3.2 percent by end-June and 3.5 percent by year-end.
Bunds had benefited from an investor flight to quality from assets in debt-laden peripheral countries like Portugal and Spain, tipped by some as next in line after Ireland and Greece to apply for a bailout if they can no longer access debt markets affordably.