Euro zone yields rise on Fed warnings, Italy rating review looms

Last Updated: Fri, Jan 13, 2017 14:55 hrs
Traders look at computer screens during Spain's bonds auction in a broker's office in Barcelona

By Abhinav Ramnarayan

LONDON (Reuters) - Euro zone bond yields rose on Friday after comments from U.S. policymakers overnight prompted concerns that monetary policy in the world's largest economy could tighten faster than previously expected.

Federal Reserve officials said on Thursday that fiscal and tax plans sketched out by the incoming Trump administration could trade a short-term economic boost for inflation and debt problems they might have to counteract.

This pushed 10-year U.S. Treasury yields up to 2.38 percent late on Thursday, a rise of 8 basis points (bps) from the trough hit earlier in the day.

Euro zone bond yields, which typically move in sympathy with U.S. Treasury yields as many investors invest in both, rose 2-4 bps across the board in early trades on Friday.

Germany's 10-year bond yield, the benchmark for the region, was up 2 bps at 0.25 percent by 0845 GMT.

"The picture is a little bit mixed but the overall tone of the Fed speakers was more hawkish, that's probably why we are seeing yields move to the upside today," said DZ Bank strategist Daniel Lenz.

Government bond yields in the major economies globally have been rising since the election of Republican Donald Trump as the next U.S. president on expectations that increased spending will boost inflation and growth in the U.S.

That move reversed a little earlier this week as Trump's long-awaited news conference on Wednesday offered little clarity on his fiscal plans.

However, as investors have also been keeping a close eye on what effect the incoming president's plans will have on monetary policy, the comments of the policy makers are pushing yields up again.

Investors will also keep a close eye on Italian bonds ahead of a crucial review of the country's credit rating by DBRS.

The Canadian agency is one of the four used by the European Central Bank and a downgrade would see the ECB increase the 'haircut' it applies to Italian bonds, piling extra stress on the country's banks that rely on its interest-free funding.

The yield on Italy's 10-year government bond was up 3 bps to 1.93 percent by 0845 GMT, slightly underperforming many of its peers.

(Reporting by Abhinav Ramnarayan; Editing by Andrew Heavens)

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