Euro zone bond yields jump as U.S. 10-year hits 5%

(Updates prices, adds U.S. 10-year yield crossing 5%)

By Harry Robertson

LONDON, Oct 23 (Reuters) - Euro zone government yields rose sharply on Monday as a sell-off in global bond markets resumed, taking the yield on the global-benchmark 10-year U.S. Treasury note to a 16-year high above 5%.

The yield on the German 10-year bond was last up 8 bps at 2.962%, although it remained below the 12-year high of 3.006% reached at the start of October. Yields rise as prices fall, and vice versa.

Yields on 10-year U.S. Treasuries, which underpin the world's financial system and set the tone for global borrowing costs, hit 5.021%, the highest since July 2007.

The yield very briefly touched 5% on Thursday for the first time in 16 years, but it marched well beyond that level on Monday.

U.S. and European yields had dipped on Friday as investors moved into safe-haven assets and sold stocks ahead of the weekend, with markets on edge about the Israel-Hamas war possibly spilling over into the wider Middle East.

But the broader story in bond markets is one of a dramatic rise in yields as investors consider a U.S. economy that refuses to slow down and growing concerns in some quarters about rising government debt levels.

"Bunds and USTs remain vulnerable ahead of Thursday's ECB and next week's Fed meetings as Friday's stabilisation in bond markets proved to be another pre-weekend insurance against geopolitical risks," said Rainer Guntermann, rates strategist at Commerzbank, in a note to clients.

The focus in Europe this week will be on Athens, where the ECB will hold a policy meeting on Thursday. Traders expect the central bank to keep rates on hold at 4% but will listen out for any hints about when and how it intends to reduce its pandemic-era bond holdings.

Germany's two-year bond yield, which is sensitive to interest rate expectations, was last up 4 bps at 3.211%.

On Friday, S&P upgraded Greece's credit rating to investment grade, the first of the "big three" ratings agencies to do so since the country's debt crisis erupted in 2010.

Greece's 10-year government bond yield was last 4 bps higher at 4.402%. The spread over Germany's 10-year yield has fallen more than a percentage point over the last year and has plummeted since the euro zone crisis.

Lyn Graham-Taylor, rates strategist at Rabobank, said investors had long expected the upgrade and so it is unlikely to have a big impact.

"I get the impression that this trade's done to death," he said. "Liquidity is fairly rubbish so I imagine a lot of people won't be rushing to fill their fund with it (Greek bonds)."

S&P affirmed Italy's investment grade credit rating, two notches above junk, on Friday, with a stable outlook.

Italy's 10-year yield was last up 5 bps at 4.972%, while its spread over Germany's 10-year yield narrowed to 200 bps after hitting its widest since January earlier this month at 209 bps.

(Reporting by Harry Robertson; Editing by Susan Fenton and Hugh Lawson)