Sept 15 (Reuters) - A key part of Germany's bond yield curve briefly inverted on Thursday in a sign that investors are growing increasingly concerned that faster ECB interest rate hikes to contain inflation will lead to a sharp economic slowdown.
Two-year German bond yields meanwhile rose to a fresh 11-year high at 1.539%, and most euro zone bond yields were higher with markets on edge over rising rates in major economies.
The gap between 10 and 30-year German government bond yields, the benchmark for the euro area, briefly fell to -1.60 basis points (bps) before rising back to 0.6 bps in late trade.
The spread between 2- and 10-year German yields tightened to around 20 bps, its lowest level since early 2021.
"I really think this is markets applying the Fed playbook to the ECB in euro markets. I think more curve inversion will come on the back of this," said Piet Christiansen, chief analyst at Danske Bank.
A flattening or inverted yield curve signals investors' caution about the economic outlook. It also suggests a central bank reaction to rising inflation may be seen as a hawkish mistake that could stifle growth.
Germany's 10-year government bond yield, the bloc's benchmark, rose 3 bps to 1.72%.
Comments from ECB chief economist Philip Lane a day earlier was seen adding to the bearish mood in bond markets. Lane, seen as an ECB "dove", repeated the central bank's pledge to keep raising interest rates, adding increments "will be larger, the wider the gap to the terminal rate and the more skewed the risks to the inflation target".
"European Central Bank chief economist Philip Lane seemingly endorsing the hawks' narrative in a speech is another clue that the central bank has experienced a significant shift in its reaction function," ING analysts said.
Commerzbank analysts flagged that ECB policymaker Martins Kazaks, seen as a "hawk", said hikes may be necessary beyond February next year given risks of second-round effects.
Italy's 10-year government bond yield rose 2.5 bps to 4.00%, with the spread between Italian and German 10-year yields at 227 bps.
Most analysts are neutral on Italian government bonds ahead of elections on Sept. 25 and positive comments from political parties about respecting EU budget rules have reassured markets.
They also highlighted that in her last press conference, ECB president Christine Lagarde reiterated the central bank's commitment to avoid so-called fragmentation.
The term refers to an excessive widening of yield spreads between core and periphery that might endanger the transmission of monetary policy across the euro area.
(Reporting by Stefano Rebaudo; Additional reporting by Yoruk Bahceli and Dhara Ranasinghe) ;))
