Short-dated European government bonds are under pressure, with Germany's 10-year yield climbing to its highest level in 17 years, as traders ramped up wagers on further European Central Bank rate hikes following the bank's upward revision to inflation forecasts.

German 2-year yields surged as much as 13 basis points to 3.20%, marking their strongest level since October 2023, while the 10-year yield added 6 basis points to 3.51%, the highest reading since 2009. The ECB raised interest rates on Thursday, a move that aligned with broad market expectations, and traders are now fully pricing in three additional increases of similar magnitude by June of next year.

UK government bonds also saw heavy selling, with the 2-year yield jumping 17 basis points to 4.87%, reaching a near three-year peak as bets on further tightening by the Bank of England intensified.

Market snapshot: Germany's 10-year yield was up 5 basis points at 3.50%; German bond futures fell 65 ticks to 120.69; Italy's 10-year yield rose 7 basis points to 4.36%; the yield spread between Italian and German bonds widened 2 basis points to 87 basis points; France's 10-year yield gained 8 basis points to 4.42%; and the 10-year UK gilt yield climbed 11 basis points to 5.36%.