Euro zone bond yields edge up on positive U.S. growth signs

LONDON, March 26 Wed Mar 26, 2014 5:09am EDT

LONDON, March 26 (Reuters) - Euro zone bond yields nudged higher on Wednesday after signs of recovery in the U.S. economy dented fixed income demand, but the rise was tempered by expectations of monetary stimulus from the European Central Bank.

Private sector data on Tuesday showing U.S. consumer confidence hit a six-year high in March suggested the world's biggest economy was gaining momentum after being held back by severe weather. This has prompted a rebound in equity markets to the detriment of low-risk government bonds.

Easing tensions between Russia and the West after the two sides drew a line under Moscow's annexation of Ukraine's Crimea region also blunted investor appetite for bonds.

Spanish and Italian 10-year yields were 1.5 basis points up at 3.34 percent and 4.24 percent respectively while German yields, the yardstick for euro zone borrowing costs, were a touch higher at 1.58 percent.

"The market is still mulling yesterday's U.S. data and risk appetite has improved and that has taken the shine off bonds," said Nick Stamenkovic, a strategist at RIA Capital Markets.

"But the 10-year Bund yield is very close to the lower end of its recent trading range, while the short end remains supported by recent dovish ECB comments."

ECB President Mario Draghi and Bundesbank President Jens Weidmann said on Tuesday that fresh stimulus from the central bank, including quantitative easing (QE), was not out of the question as the euro zone battles with deflationary pressures.

The Bundesbank has previously expressed scepticism about such measures. The ECB's next policy meeting comes next week.

Market focus is now largely on German inflation data due on Friday. If this points to euro zone inflation remaining very subdued, it could increase pressure on the ECB to act sooner rather than later.

But despite Weidmann's comments, some said they still saw ECB asset purchases to support the economy as a last resort.

"Mr Weidmann's comments yesterday were superficially positive about QE. They have not changed our view that QE is an absolute last resort - rather we view the comment as an indication that easier ECB policy remains on the table," RBS strategists said in a note. (Editing by Gareth Jones)

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