By Elizabeth Howcroft and Yoruk Bahceli
LONDON (Reuters) -Euro zone government bonds stabilised on Friday after a sharp sell-off in the previous session but the German 10-year yield was still on track for its biggest weekly rise in two months.
Investors are closely watching for any signs that the economic recovery from COVID-19 is gathering sufficient pace for central banks to start scaling back extraordinary monetary stimulus, though both the U.S. Federal Reserve and the European Central Bank have said that is not the case yet.
Key benchmark yields hit multi-month highs on Thursday after U.S. economic growth and German inflation data came in higher than expected, strengthening the case for a pullback.
Preliminary data on Friday showed the euro zone economy shrank less then expected in the first three months of the year, while headline inflation picked up as expected.
At 1447 GMT, Germany's 10-year yield, the benchmark for the region, was down nearly two basis points at -0.21%, having touched its highest in more than a year on Thursday at -0.177%.
Italy's 10-year yield was also down one basis point at 0.87%, compared to Thursday's 7-month high of 0.895%.
Lyn Graham-Taylor, rates strategist at Rabobank, said that he does not expect the German Bund yield to move significantly higher, and expects the spread between U.S. and euro zone yields to widen as the U.S. economic recovery gathers pace.
But some investors are positioning for a further Bund sell-off as vaccination rollouts speed up in the European Union.
"The direction of EUR interest rates is no longer in doubt," ING strategists wrote, also citing the jump in European economic confidence indicators and inflation surveys.
But they still have reservations about the sustainability of faster inflation in the euro zone, which is expected to be transitory.
Elsewhere, Germany announced investor meetings for its upcoming issuance of green bonds, according to a memo seen by Reuters.
After last year issuing five- and 10-year green bonds -- securities that fund environmentally beneficial projects -- Germany's finance agency is planning a 30-year syndicated issue in May.
The finance agency will hold bilateral calls from next Tuesday, followed by a global investor call on Thursday, the memo said.
Germany is building a green yield curve, which other countries and companies could then use as a reference point for their own sales.
(Reporting by Elizabeth Howcroft and Yoruk Bahceli; Editing by Pravin Char, Kirsten Donovan)