* Euro zone bonds extend Fed-induced sell-off
* Ten-year German yield hits highest since April 2012
* Bunds may recover as periphery yields rise-analyst
* Belgian bonds underperform as debt sales weigh
By Emelia Sithole-Matarise and Marius Zaharia
LONDON, June 24 (Reuters) - Bond yields rose across the euro zone on Monday, with those on 10-year German Bunds hitting 14-month highs, as the prospect of the Federal Reserve cuting its bond purchases took a further toll on battered debt markets.
Bund yields were expected to rise further in the coming days, but weakness in the euro zone economy and rising borrowing costs in the bloc’s peripheral countries could soon revive investor demand for the low-risk German paper, analysts said.
The Federal Reserve signalled last week it would scale back the pace of its stimulative bond purchases with a view to ending it in 2014, hitting a range of assets across the world, including bonds and stocks.
The Bank for International Settlements echoed the theme on Sunday, saying central banks should not let fear of disrupting markets delay timely withdrawal of cheap money.
Signs of a cash crunch in China’s banks over the last week have also added to the sell-off in global markets.
Bund futures hit a low of 139.90, down 149 ticks on the day and their lowest since October 2012. German 10-year yields rose 10 basis points to 1.82 percent, their highest since April 2012 as U.S. benchmark yields hit near two-year peaks.
“Nobody wants to catch a falling knife but looking at the size of the move we have now reached levels where Bunds are oversold and I doubt that we will see the 1.95 percent yield level within the next few days or months,” said Christian Lenk, a strategist at DZ Bank.
“We will probably see a counter reaction and maybe markets will realise that the situation in U.S. Treasuries is different to that in Europe and is not comparable neither in economic terms nor in terms of the policy of the central banks.”
Norbert Wuthe, rate strategist at Bayerische Landesbank in Munich, said Bunds could soon recover as the rise in peripheral yields, along with economic and political weakness, should renew safe-haven bids for German debt.
Italy said it planned to delay raising value added tax by at least three months. In Greece, one party pulled out of the government last week, leaving Prime Minister Antonis Samaras with a wafer-thin majority in parliament.
Policymakers failed on Saturday to take a step closer to a banking union, which is seen as vital to breaking the link between banks and indebted sovereigns.
“There’s a good chance of a Bunds recovery,” Wuthe said.
Italian 10-year yields were 24 bps higher on the day at 4.82 percent, while equivalent Spanish yields rose 18 bps to 5.06 percent.
Belgian bonds were among the worst performers on Monday after the country’s 10-year borrowing costs rose to their highest in a year at a debt sale earlier in the day and it set a smaller than expected target for the auction.