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Nov 1 (Reuters) - Euro zone bond yields extended their surge on Monday as money markets largely held onto their rate hike bets from the European Central Bank next year.
At the ECB's policy meeting last week, president Christine Lagarde disappointed expectations of a firm pushback against the recent pricing of two ECB rate hikes next year that are at odds with the bank's inflation projections.
The anxiety sent bond yields surging on Thursday and Friday, as investors saw the ECB as lacking confidence in its own outlook and started to focus on the implication for the bank's bond purchases.
In a sign that investors remain cautious, money markets were little moved after pricing in a full 10 basis-point ECB rate hike by July 2022 and two full hikes by October on Friday .
Analysts also highlighted the simultaneous rise in borrowing costs for safe-haven Germany as well as the more fragile southern Europe as a worrying sign.
Lyn Graham-Taylor, rates strategist at Rabobank, said it was a sign investors are growing more uncertain about the ECB's reaction function.
It "isn't really a sustainable move for the ECB. Something is going to have to give," he said, adding that either German bond yields would start to fall as a result of an eventual safety bid, or the ECB would have to address the uncertainty.
Bond yields in Southern Europe, which has been the biggest beneficiary of ECB support, continued to surge and Italy's 10-year yield rose 14 basis points from Friday's close by 1245 GMT to 1.278%, a fresh peak since July 2020.
Up 38 bps over the last three sessions, it is set for its biggest three-day rising streak since the height of the pandemic in March 2020.
Spain's 10-year yield rose 5 bps to 0.674%, the highest since June 2020.
Greek yields, which surged nearly 30 bps on Friday, were only one bp higher
Germany's 10-year yield, the benchmark for the euro area, rose two bps to -0.069% but held below Friday's peak of -0.064%, which was the highest since May 2019.
Its 30-year yield, which fell sharply last week, rose 3 bp to 0.17%.
That steepened its yield curve as measured by the difference between 10- and 30-year yields slightly, though it was still near the flattest since March 2020 touched on Friday. .
The closely-watched gap between Italian and German 10-year yields, effectively the risk premium on Italian debt, rose another 12 bps to 135 bps, a fresh November 2020 high.
Markets will remain on edge this week, awaiting policy decisions from the Reserve Bank of Australia, the U.S. Federal Reserve, the Bank of England and the Norges Bank.
Elsewhere, three-month Euribor fell to a new record low at -0.558%.
Some 20.5 billion euros worth of euro zone government bonds will be issued this week, Commerzbank said, though adding that this would mostly be offset by a similar amount of flows from coupon payments and redemptions.
Reporting by Yoruk Bahceli; Editing by Sherry Jacob-Phillips and Sujata Rao