Euro zone bond yields fell sharply on Thursday as Russia's launch of an all-out invasion of Ukraine boosted safe-haven assets.

The news prompted a flight to safety across global markets and bond yields fell as prices rallied.

Germany's 10-year yield, the benchmark for the euro area, fell eight basis points to the lowest in three weeks at 0.131% in early trade and was down 6 bps at 0.16% by 0849 GMT.

Two and 30-year yields were also down 6 bps.

Most other 10-year bond yields across the bloc were also down, 5-6 bps on day.

Euro zone bond yields mixed, focus on Ukraine crisis

Italian bonds underperformed. The closely-watched risk premium over German bonds rose briefly to 176 bps, the highest since July 2020 and was last at 173 bps.

In the credit market, the cost of insuring exposure to a basket of European high yield corporate bonds touched the highest since October 2020 at over 385 bps.

"It's what one would expect, flight to quality. It's dominating in the initial response," said Rainer Guntermann, rates strategist at Commerzbank, noting that bonds across the yield curve were rallying roughly equally.

The focus will turn to what the conflict means for the European Central Bank, which economists expect will end its bond purchases and hike rates this year to combat record-high inflation. Policymakers will gather on Thursday at an informal meeting that was announced last week.

In the most cautious statement from a policymaker yet, the bank should continue bond buying until at least year-end and keep it open-ended to cushion the fallout from any conflict in Ukraine as the economic outlook is "much more uncertain", ECB policymaker and Greek central bank governor Yannis Stournaras told Reuters.

Money markets continued to price in 40 bps worth of ECB rate hikes by the end of the year on Thursday, with the first 10 bps rate hike priced in for July.

Inflation-linked bond yields have fallen faster than conventional bond yields this week, pushing market-based gauges of inflation expectations higher as energy prices have spiked on the back of the Ukraine conflict.

They rose sharply on Thursday to the highest in five weeks at 1.8773%.

"You can call it war in Europe but for that it's still a relatively modest (market) response," Guntermann at Commerzbank said of the move in bond yields.

"It's probably really about the ECB and inflation".