May 3 (Reuters) - Germany's benchmark 10-year Bund yield rose to 1% for the first time since 2015 on Tuesday, before retreating as a dose of caution set in ahead of anticipated interest rate hikes in the United States and Britain this week.
Australia's central bank raised its cash rate by an unexpectedly large 25 basis points (bps) to 0.35% earlier, the first hike in over a decade, and flagged more to come.
That reminder that major central banks are determined to contain inflation helped send German Bund yields to as high as 1.016%. But yields drifted lower as the session wore on and were last down 2.3 basis points at 0.93%.
U.S. 10-year Treasury yields, which broke above the key 3% level on Monday, also fell as investors snapped up beaten down bonds and covered positions before the Federal Reserve's two-day meeting.
The Fed is expected to conclude its meeting on Wednesday with a 50 bps rate hike. The Bank of England is expected to lift rates by 25 bps on Thursday.
"A Fed's hawkish surprise involving a 75 basis points hike would mean that German bond yields might rise to 1.25% by the end of this week or early next week," Rohan Khanna, senior strategist at UBS, said.
Euro zone producer prices surged more than expected in March as energy prices more than doubled year-on-year, data showed on Tuesday, while unemployment continued to fall, hitting a new record low.
Italy's 10-year bond yield fell 2.5 bps, after hitting its highest since March 2020 of 2.9%.
The Italian/German 10-year yield gap briefly widened to 192 bps, its widest since June 2020.
"So far, the widening of spreads has been reasonably orderly," said Fabio Castaldi, senior investment manager at Pictet Asset Management.
"However, in case those dynamics become disorderly, we would expect new measures by the ECB to avoid fragmentation," he added, referring to yield spread widening which could hamper the transmission mechanism of monetary policy.
Castaldi said that "the target of 200 bps (for the Italian-German spread) was in sight."
Inflation remained in focus, with a market gauge of euro zone expectations at 2.43% after rising to 2.57% last week, the highest since 2012, according to European Central Bank data. .
Commerzbank analysts flagged the correlation between inflation break-evens and oil prices and the potential disruptive impact of Chinese lockdowns on the supply chain, which might boost inflation.
Oil fell by about 1% as concerns about demand due to China's prolonged COVID lockdowns outweighed support from a possible European oil embargo on Russia.
Germany's 10-year break-even rate, the difference between inflation-linked and nominal bond yields of the same maturity, was at 2.68%, just off its highest since August 2010 of 2.77%. Germany meanwhile sold 560 million euros in a top-up of its 0.10%, 2033 inflation-linked bond at the lowest price of 122.1, with an average yield of -1.73%.
(Reporting by Stefano Rebaudo; additional reporting by Dhara Ranasinghe; Editing by Jason Neely and Andrea Ricci)
