A worker grabs a pack of 20-euro notes at the Bank of Portugal fortified complex in Carregado, Alenquer
A worker grabs a pack of 20-euro notes at the Bank of Portugal fortified complex in Carregado, Alenquer, Portugal, May 17, 2022.

Euro zone government bond yields edged back towards September's multi-year highs on Thursday as investors await the minutes from the European Central Bank's September meeting for clues on the future pace of tightening.

The ECB raised their three key interest rates by 75 basis points each at that policy meeting and signalled they expected interest rates to rise further in the coming meetings to bring inflation back towards their 2% medium-term target.

The minutes will be scrutinised for hints on how high the central bank plans to take rates and whether there was any discussion on the central bank's plans to shrink its balance sheet.

"Of particular interest should be the question as to how much consensus there was within the Governing Council regarding the pace of the rate-hike cycle," said Daniel Lenz, head of strategy for euro interest rate markets at DZ Bank.

"Should the euro zone's top monetary policymakers have been reading from the same page, the next jumbo step from Team Lagarde will probably be on the cards for the get together on 27th October."

Money markets are almost fully pricing in another 75 basis point interest rate hike at the October meeting with around 125 basis points of tightening by year-end, according to data from Refinitiv.

By 0758 GMT, the German 10-year yield was up 3.5 basis points (bps) at 2.055%. It hit an 11-year high of 2.352% on Wednesday last week.

Italy's 10-year yield was up 2.5 bps to 4.473% after rising by 27 bps on Wednesday, its largest daily jump since March 2020.

The rise in Italian yields came amid fading ECB support for the country's bonds during the summer. Bond yields move inversely with prices.

The ECB said holdings of Italian bonds under its Pandemic Emergency Purchase Programme (PEPP) shrunk by 1.24 billion euros in August and September.

This followed a 9.76 billion euros increase in the previous two months, when the ECB announced plans to use PEPP reinvestments to prevent bond yields and spreads from rising too far or too fast in the weakest countries.

"While the negative sign can be explained by timing issues over the thinner summer months, the data still reveal that the ECB has not followed up with larger purchases," Commerzbank rate strategist Hauke Siemssen said in a note.

"The positive interpretation for BTPs is that key spread levels continue to hold without ECB support despite rising yields."

The closely watched yield gap between Italian and German 10-year yields was steady at around 242 bps on Thursday.

On the supply front, today sees issuance from Spain and France, including an ultra-long sale of a 2066 OAT from France and tenors up to 30-years from Spain.