* 10-year Bund yields above 2 pct; UK, U.S. yields rise
* ECB expected to keep soft tone, action seen unlikely
* Spanish debt auction goes smoothly
By Marius Zaharia
LONDON, Sept 5 German Bund yields hit 1-1/2 year
highs on Thursday as an improving economic outlook hammered
top-rated bonds globally and investors expected little to
counter the trend from central bank meetings later in the day.
British gilt yields and U.S. T-note yields US
10YT=RR hit their highest since July 2011 close to 3 percent.
The Bank of England and the European Central Bank are both
expected to keep interest rates on hold, with the Federal
Reserve seen the only major central bank to respond to the data
by trimming monetary stimulus, possibly at its Sept. 18 meeting.
While the BoE is not expected to issue a statement after the
meeting, ECB President Mario Draghi's reaction to the recent
market move will be closely scrutinised as it goes against his
aim of injecting a "downward bias" on rates.
"Markets are reacting to the recent data improvement.
Running into these central bank meetings there is little faith
they are going to give us anything that can keep ... rates low,"
RBS rate strategist Harvinder Sian said.
The ECB is facing higher money market rates than before
July, when it took the unprecedented step of promising to keep
interest rates low for a long time, in a bid to curb the impact
from policy shifts across the Atlantic
Since then, forecast-beating euro zone data has renewed
rising pressure on money market rates, which 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.
Tighter market conditions might create discomfort within the
ECB, analysts say, as they threaten the euro zone recovery.
But with the ECB failing to agree on cutting rates in July,
when they had "extensive" talks about it and when the economic
outlook looked worse, analysts see little option for the bank
other than just maintaining a soft tone in communication.
"(Draghi) will talk dovishly, but I think his attempts to
keep a lid on ... rates will prove difficult," RIA Capital
Markets strategist Nick Stamenkovic said.
Sian at RBS said "the dovish tone from the ECB is an
oxymoron," adding markets lacked confidence in its promise.
German 10-year yields rose above 2 percent for
the first time since March 2012 and were 7 basis points up on
the day. Bund futures fell 60 ticks to 139.13.
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.
While low-risk markets got pummelled, 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 the bottom.
"These results... will serve to endorse if not further
encourage the evident bullish momentum (in Spanish bonds),"
Rabobank senior rate strategist Richard McGuire said.
The yield gap between Spanish and Italian 10-year bonds
shrank to its tightest in 1-1/2 years of 2 bps last week due to
the risk that a vote on whether to expel Silvio Berlusconi from
the Senate could bring down the government.
Supply pressure in Spain widened the spread
back to about 10 bps, but some analysts expect the
move to reverse with the auction out of the way.
"The auction was very solid. Confidence is coming back into
that market ... we do anticipate Spain should trade through
Italy now," Sian of RBS said.