TREASURIES-U.S. yields soften after vaulting to one-year highs; sentiment wary

LONDON, Feb 26 (Reuters) - An overnight jump in U.S. Treasury yields showed some signs of subsiding in cautious European trading on Friday, thanks to a broader retreat in euro zone yields, but worries about rising inflation expectations weighed on sentiment.

Benchmark 10-year U.S. borrowing costs rose to their highest in a year at 1.614% overnight, rocking stock markets. Yields are up more than 70 basis points so far this year.

But in London trading, benchmark yields edged 3 basis points lower to 1.48%. They are now down more than 12 bps below overnight highs.

Though bond yields retreated across the yield curve, yields in major government bond markets are still on track to post their biggest monthly rise in years. Benchmark German bond yields are set for their biggest monthly increase since January 2018 with a 27 bps rise.

The rise in bond yields, spurred on by fiscal stimulus hopes in the United States and a post-pandemic economic rebound that could fuel inflation, has reverberated across global markets. But market watchers warn the retreat in yields maybe temporary.

"We have potentially strong U.S. data to come later today and rates, credit and equities market are all vulnerable to more correction lower in price on upside economic surprises," said Peter Chatwell, a strategist at Mizuho International.

The surge in bond yields spilled over to money markets. Eurodollar futures contracts maturing in September 2023 posted record volumes overnight with more than 800,000 contracts traded, according to Refinitiv data.

The U.S. yield curve as measured by the spread between two-year and 10-year U.S. yields steadied at 132 bps after hitting a December 2016 high of 135 bps overnight. (Reporting by Saikat Chatterjee, editing by Larry King)