(Bloomberg) -- Global bonds fell in thin trading on concern China’s decision to relax coronavirus curbs would spur inflation.

European debt led the slide with German 30-year yields rising 18 basis points to 2.44%, the highest since October. The equivalent US Treasury rate was up 11 basis points at around 3.94%, the highest since mid-November, while the 10-year yield jumped 10 basis points to 3.85%. Volumes across markets were muted with several countries, including the UK, still on holiday.

The yield on 10-year Australian debt rose about 15 basis points to 3.98% in early Asia trading Wednesday after a two-day holiday.

China will soon no longer subject inbound travelers to quarantine and has downgraded the management of Covid from its highest level. An end to self-imposed global isolation that battered the world’s second-largest economy could help spur global economic growth and fuel price increases. That risks lessening the appeal of fixed income even after a year of historic losses.

“We still live in a perverse world where good news is bad news,” Gershon Distenfeld, the co-head of fixed income at AllianceBernstein, said in an interview with Bloomberg Television. “China is a cyclical thing that we have to look at as the largest economy reopens. That may cause inflation to come down a little bit slower than the Fed would like.”

The US 10-year breakeven rate - a bond market gauge of inflation over the next decade - rose five basis points to 2.28%. It was as low as 2.12% less than two weeks ago.

Treasuries also faced pressure from the start of this week’s auction cycle, the year’s final sales of coupon-bearing debt. A $42 billion auction of two-year notes Tuesday was met with strong demand. There are also auctions for five- and seven-year notes over the next two days. 

While many analysts are forecasting a better performance by bonds in 2023, investors remain concerned that persistent price pressures could force the world’s biggest central banks into further tightening. A surprise policy shift last week from the Bank of Japan sent shock waves through global markets.

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Despite a global bond selloff Tuesday, spreads on dollar debt from emerging market governments narrowed as appetite for riskier assets improved. The extra yield investors demand to hold developing-world bonds over similar Treasuries narrowed 11 basis points, according to a JPMorgan Chase & Co. index. 

ECB Governing Council member Klaas Knot said the central bank’s tightening cycle has only the passed halfway point. The ECB would achieve “quite a decent pace of tightening” through half percentage point rises in the next several months before borrowing costs eventually peaked by the summer, he told the Financial Times.

“China’s insatiable demand for raw materials and all things energy will push up prices of those commodities, much to the consternation of the Fed and ECB,” said Stephen Innes, managing partner at SPI Asset Management. 

--With assistance from Maria Elena Vizcaino, Philip Sanders, Elizabeth Stanton and Matthew Burgess.

(Updates with Australian 10-year bond yield.)

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