Oct 19 (Reuters) - Euro area borrowing costs were close to their highest in around a decade as investors balanced expectations for higher-for-longer rates against appetite for safe-haven assets on fears that the conflict in the Middle East might widen beyond Gaza.
Bond prices move inversely to yields.
U.S. President Joe Biden had planned to meet Arab leaders, but Jordan called off his planned summit there with Egypt and the Palestinian Authority after Tuesday's hospital blast in the Palestinian enclave.
European Central Bank officials recently reiterated that rates would have to stay at high levels for an extended period as it was too early to celebrate victory over inflation, with some suggesting that an additional hike was possible.
Germany's 10-year government bond yield, the benchmark for the euro area, rose 3 basis points (bps) to 2.95%. It hit its highest level since July 2011 at 3.024% a couple of weeks ago.
Meanwhile, appetite for safe-haven assets led investors to underweight Italian bonds, perceived as riskier than Bunds, driving Italy's yields to their highest in almost 11 years and widening their spread against German bonds.
Italian BTPs yield was up 3.5 bps at 5.02%, after hitting 5.034%, its highest since Nov. 2012.
The gap between Italian and German 10-year yields , a gauge of market confidence towards the euro area's most indebted countries, widened to 207 bps. It recently hit its widest since January at 209 bps.
Spanish and Portuguese bonds, the best in class of the euro area periphery, showed yields respectively close to their highest levels since January 2014 and April 2017.
Investors are looking at Friday's rating reviews for Italy and Greece by S&P and France by Moody's.
"Our base case is for no change in ratings for Italy or France, but a change in outlook cannot be ruled out," Citi analysts said in a research note.
"BTPs are likely to be more sensitive to any adverse rating action than OATs given their proximity to the sub-investment grade threshold and current investor sensitivity to economic fundamentals, with a 5-10 bps widening possible on an outlook change," they added.
France's government bonds (OATs) align with their German peers, with the 10-year yield up 3 bps at 3.70%.
With a BB+ positive rating, analysts expect a one-notch upgrade to an investment grade level in the near term for Greece, given the current prudent fiscal trajectory likely to persist after recent elections.
Greece's 10-year yield was up 5 bps at 4.44%. In October 2022, it hit 5.124%, its highest level since Dec. 2017. (Reporting by Stefano Rebaudo, editing by Tomasz Janowski)
