LONDON Euro zone government bond yields were set to end the first trading week of the year with their biggest weekly rise in at least a month, a sign that a pick-up in inflation is starting to unnerve bond investors.
The start of 2017 has been dominated by investor worries that rising inflation could erode the value of bonds, pushing yields - which move in the opposite direction to prices - sharply higher.
The trigger for those concerns has been data suggesting that price pressures are increasing, a sharp contrast to a year ago when deflation risks loomed large.
Data on Tuesday showing inflation in Germany, the euro zone's biggest economy, touched its highest level in more than three years in December was followed on Wednesday by news that consumer prices in the bloc rose by 1.1 percent last month, nearly twice as fast as in November.
In addition, oil prices hit an 18-month high on Tuesday and were trading close to those levels on Friday.
"The flash estimates of inflation in December, especially in Germany, surprised to the upside," said Chris Scicluna, head of economic research at Daiwa Capital Markets.
"Even though the ECB's policy is pre-determined until the end of the year, headline inflation will continue to rise, so the risks to yields are on the upside."
The European Central Bank's asset purchase programme runs through to the end of 2017.
Germany's 10-year Bund yield, the benchmark in the single currency bloc, was at 0.25 percent, steady on the day and about 4 basis points higher this week - the first weekly rise in a month.
Many banks expect Bund yields to end the year around 0.8 percent.
French, Irish and Austrian 10-year bond yields were all set for their biggest weekly rise in almost two months. Portugal's 10-year bond yield, meanwhile, held close to an 11-month high above 4 percent hit on Thursday.
Euro zone bond yields are facing upward pressure from hefty supply as well - January is one of the busiest months of the year for debt auctions in the region.
France and Spain sold more than 13 billion euros worth of debt on Thursday, while Germany kicks off its bond funding for 2017 next week.
The rise in euro zone yields this week also contrasts with U.S. Treasury yields, which fell broadly on Thursday as investors grew risk-averse amid uncertainty about the incoming Trump administration.
Focus was expected to turn to U.S. economic growth prospects later on Friday with the release of non-farm payrolls data.
(Reporting by Dhara Ranasinghe; Editing by Mark Heinrich)