German yields hit 1-1/2 year highs as ECB stands pat
* Ten-year Bund yields above 2 pct; UK, U.S. yields rise
* ECB keeps dovish tone but policy action seen unlikely
* Spanish debt auction goes smoothly
By Emelia Sithole-Matarise and Marius Zaharia
LONDON, Sept 5 (Reuters) - German 10-year Bund yields broke through 2 percent for the first time since March 2012 on Thursday as an improving economy hit core bonds and the ECB signalled no imminent policy action to counter the trend.
British ten-year gilt yields and U.S. T-note yields hit their highest since July 2011 close to 3 percent.
The European Central Bank and the Bank of England kept interest rates on hold, leaving the Federal Reserve as the only major central bank seen as likely to respond to a run of strong global economic data by trimming monetary stimulus, possibly at its Sept. 18 meeting.
Strong U.S. services data and a forecast-beating fall in jobless claims suggested further improvement in the labour market before Friday's payrolls report, reinforcing the view the Fed might cut its bond purchases soon.
Euro zone government bond yields spiked across the credit spectrum and money market rates rose even as the ECB said in its September policy statement it was ready to cut interest rates or pump more money into the economy.
ECB President Mario Draghi said that, despite improvements, risks to the economy remained to the downside.
Euribor futures fell 2-11 basis points across the strip , pushing their implied rates higher, while German 10-year yields jumped above 2 percent for the first time since March 2012, up 10 basis points.
"Despite the dovish talk there's no concrete action regarding anything in the pipeline. It's just more of the same from Draghi hoping that talk will keep things contained," said Philip Tyson, a strategist at ICAP.
"We are seeing a continuation of the move that we've been seeing in the last few weeks with the markets adjusting to the fact that growth is picking up. With (U.S.) payrolls tomorrow ...It looks to me like perhaps it's got a little further to go."
The rise in bond yields and money market rates present a challenge to the ECB, which in July took the unprecedented step of promising to keep interest rates low for a long time in a bid to curb the impact of policy shifts across the Atlantic.
Forecast-beating euro zone data has added to the rising pressure in money market rates, which has filtered through to longer-term maturities on the benchmark German yield curve, reflecting the fact that investors have brought forward expectations of a rate hike.
Bund futures fell more than a full point to 138.59, their lowest level in nearly a year. Markets appeared to have cast aside worries about Syria for the moment even as a possible U.S. military strike moved one step closer after a Senate committee voted in favour of action.
Portuguese bonds underperformed the rest of the euro zone market, with lingering concerns about Lisbon's ability to stick to austerity measures after its Constitutional Court dealt a blow to part of the programme, adding to the selling pressure.
Portuguese 10-year yields rose back above 7 percent for the first time since July, when a since resolved political crisis almost derailed Lisbon's international bailout.
"It's a pretty fierce meltdown today for Portugal, in what appears to be a double-whammy of a bearish move throughout the euro zone and questions concerning Portugal itself, including its political problems," said David Schnautz, a strategist at Commerzbank in New York.
"Portugal is among the countries that are still in trouble, among the weakest links in EMU. There's still a bit of an overhang from the constitutional court decision last week."
Italian 10-year yields were 11 bps higher on the day at 4.53 percent while Spanish equivalents were 10 bps up at 4.61 percent.
Before the ECB meeting, Spain smoothly sold the maximum 4 billion euros planned at an auction of five- and 10-year bonds, with borrowing costs falling on signs the recession-hit economy may have hit bottom.
The yield gap between Spanish and Italian 10-year bonds shrank to its tightest in 1-1/2 years at 2 bps last week due to the risk that a vote on whether to expel former premier Silvio Berlusconi from the Senate could bring down the government in Rome.
Supply pressure in Spain widened the spread, but some analysts expect that move to reverse with the auction out of the way.
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