* Prospect of reduced US stimulus keeps up selling pressure
* German, UK GDP add to signs of improving global growth
* Uncertainty over how ECB will react to rising yields
By Marius Zaharia
LONDON, Aug 23 German government bond yields hit
new 1-1/2 year highs on Friday as an improved economic outlook
and prospects of reduced U.S. monetary stimulus maintained
selling pressure on low-risk debt.
Data confirmed that Germany's economy saw solid
second-quarter growth, while the UK economy expanded more than
Purchasing managers' surveys (PMIs) on Thursday showed
business activity in the euro zone picked up this month faster
than expected, raising expectations the third quarter will show
"Data this morning is reinforcing the view economies are
picking up. The bias is for core yields to move up," said Alan
McQuaid, chief economist at Merrion Stockbrokers in Dublin.
German 10-year yields rose 4 basis points to
1.962 percent, their highest since March 2012. German Bund
futures fell 47 ticks to 139.26, their lowest since
One key question for investors is how the European Central
Bank will react to the rise in yields, especially since it is
not entirely driven by a recovering economy. Part of it is
fuelled by developments in the United States, where the Federal
Reserve is expected to slow down asset purchases next month.
Money market rates have risen to levels last seen in June,
just before the ECB took the unprecedented step of promising to
keep rates low for a long time. Some analysts warn tighter
market conditions could drag on the recovery.
Jan von Gerich, chief strategist for developed markets at
Nordea in Helsinki, said the ECB can do very little about it.
"The (ECB) Governing Council remains divided. If they
couldn't garner support to cut rates earlier, they surely can't
do that now," von Gerich said, adding the ECB will probably
attempt "verbal intervention" to talk down short-term rates.
The ECB's Ewald Nowotny said he saw no reason for interest
rate cuts, contrasting with remarks earlier this month from
Executive Board member Peter Praet, who stressed the bank's
German Finance Minister Wolfgang Schaeuble said in a
newspaper interview on Friday that the ECB has made clear it
will raise interest rates again once the euro zone economy
improves and that he welcomed that prospect.
German two-year yields were last 3 basis
points higher at 0.26 percent, closer to the June highs of 0.33
percent than the July lows of 0.7 percent.
"Given the still shaky ground of the recovery in peripheral
economies ... we expect the ECB will ultimately act to
strengthen the forward guidance, capping Schatz yields and
allowing the curve to steepen a lot further," Credit Agricole
rate strategist Peter Chatwell said in a note.
"However ... as things stand with forward guidance
relatively ineffective we think Schatz are rich, so until the
ECB acts we think the Schatz can tend towards 0.34 percent."
Other euro zone bonds were stable.