German Bunds fall after Fed's George says wants rate hikes

Fri May 30, 2014 3:33am EDT

* Germany 10-year yields bounce off year's lows

* Fed's George says hikes could be steeper than expected

* Euro zone bonds retreat capped by ECB easing outlook (Adds detail, moves in other euro zone bonds)

By Emelia Sithole-Matarise

LONDON, May 30 (Reuters) - German bond prices fell on Friday, tracking a decline in U.S. Treasuries after Federal Reserve policymaker Esther George said rate rises should be steeper than many in the market expected.

The Kansas City Federal Reserve Bank President reiterated her view that the Fed should start to raise rates shortly after it ends its current round of bond purchases or quantitative easing programme.

The Fed is on target to phase out bond buying completely by the autumn but Fed Chair Janet Yellen has said short-term interest rates will stay at their near-term zero level for a considerable time afterwards, and will then rise only gradually.

"The market is pricing in a very benign interst rate cycle in the U.S. but whilst Yellen seems to be on the dovish front, George is signalling some members of the Fed are less dovsih going forward," RIA Capital Markets strategist Nick Stamenkovic said.

"The difference among policymakers should become marked once the Fed completes QE and that could start unnerving the market."

German 10-year yields, the benchmark for euro zone borrowing, were up 2 basis points (bps) at 1.32 percent, mirroring a similar rise in yields on U.S. 10-year notes.

Traders said George's comments were prompting some investors to book profits after a sharp across the board rally in euro zone bonds this week which drove German yields to a year low of 1.28 percent and peripheral yields back to historic troughs.

The retreat was, however, capped by expectations that the European Central Bank will deliver further monetary stimulus at its meeting next week after several policymakers signalled the bank was primed to act to foster the region's economic recovery.

Investors were also focused on preliminary inflation data from Spain and Italy due later in the day, with any downside surprises expected to put further pressure on the ECB next week.

"Downside inflation surprises could well see Bunds push through recent lows and sustainably lower than the 1.30 percent mark in 10-year Bunds," RBS strategists said in a note.

Yields on Italian and Spanish 10-year bonds held steady at 2.91 and 2.87 percent respectively, not far from record lows hit this week while Portuguese yields edged up 3 bps to 3.66 percent. (Editing by Louise Ireland)

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