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Oct 27 (Reuters) - Germany's 10-year bond yield fell to the lowest in more than a week and its yield curve flattened on Wednesday.
After a brief pause, government yield curves across developed markets are back to flattening over the last two sessions.
That is a move which analysts say may reflect concern that central banks, particularly the Bank of England, might commit a policy error if they tighten policy too early on the back of high inflation levels that may prove temporary.
Germany's 10-year yield, a benchmark for the bloc, fell to the lowest in more than a week at -0.168%, falling alongside U.S. Treasury and British gilt yields, and was down 4 bps by 1028 GMT. It was set for its biggest daily fall in nearly two weeks.
The yield curve flattened as 30-year yields fell more than 5 bps to 0.19%, the lowest in five weeks.
A key market gauge of long-term euro zone inflation expectations - the five-year five-year breakeven forward - briefly hit a seven-year high at 2.0951%, continuing to hold above the ECB's 2% target.
"With rising infections, slowdown in PMIs ... having a very narrow inflation focus may not be the best ... insisting on raising rates, when the factors that have driven inflation upwards are supply-related rather than demand-related," said Jens Peter Sorensen, chief analyst at Danske Bank.
"I guess the markets are beginning to acknowledge this."
The "real" yield on Germany's 10-year inflation-linked bond fell further to a new record low at -2.051%.
Focus is also on Thursday's ECB meeting, where the bank is expected to keep policy unchanged and leave a decision on its pandemic emergency bond purchase programme to December.
But President Christine Lagarde is expected to push back on market pricing given the surge in inflation expectations and a rate hike priced in for next year that is at odds with the ECB's economic projections.
"The ECB is not going to be raising rates next year ... If they still believe that then they have to say it quite forcefully and that should bring a bit of relief," Chris Iggo, chief investment officer for core investments at AXA Investment Managers, said.
While Iggo acknowledged that some ECB policymakers have pushed back against market pricing, "it needs to be done at a policy press conference by Lagarde, it needs to be quite forceful," he said.
In the primary market, Germany raised 1.509 billion euros from a re-opening of a 15-year bond.
The auction was a technical failure as it received 1.925 billion euros of demand, less than the 2 billion euros Germany was targetting. It is the third technical failure in a row at German auctions, according to Refinitiv IFR. (Reporting by Yoruk Bahceli; Editing by Alexander Smith and David Holmes)