* German yields rise after strong U.S. services data
* Market edgy before ECB policy meeting on Thursday
* Media reports reiterate ECB dovishness
* Germany avoids third straight auction failure
* Investors still see juice in peripheral rally
(Recasts with U.S. data, rise in yields)
By Emelia Sithole-Matarise and John Geddie
LONDON, June 4 German bond yields rose to near
two-week highs on Wednesday after strong U.S. services sector
data overshadowed weaker than expected private sector jobs data
to show solid growth in the world's biggest economy.
The U.S. services sector grew in May at the fastest pace in
nine months as new orders and business activity jumped.
The data came amid nervousness in euro zone bonds before the
European Central Bank's policy meeting on Thursday, weighing the
risk that the bank may disappoint a market primed for aggressive
policy measures to fight potential deflation.
German 10-year yields, the benchmark for euro
zone lending, rose 2 basis points to 1.39 percent, near their
highest level since mid-May. Still, German bonds continued to
outperform U.S. Treasuries, particularly in shorter-dated
maturities with the ECB set to ease policy. The 2-year T-note
yield premium over German debt is within touch of its highest
level since 2010 of 35 bps.
"There was decent ISM services data in the States and that
looks to have pulled yields up but everyone is on a bit of a
knife-edge heading into the ECB meeting," said Lyn
Graham-Taylor, fixed income strategist at Rabobank.
"There's so much priced in that there's room for
disappointment. (ECB President Mario (Draghi) has created a bit
of a monster and the market is not going to take disappointment
The ECB measures are expected to include an unprecedented
cut in its deposit rate into negative territory and measures
aimed at boosting lending to small and mid-sized firms (SMEs).
Media reports overnight appeared to underline the ECB's
readiness to act at Thursday's meeting as well as signalling
future policy action. Bloomberg cited unnamed central bank
officials as saying Draghi is likely to say that any rate cut
this week won't necessarily be the last even though the deposit
rate is expected to move into negative territory for the first
One official added that an anticipated scheme designed to
boost lending to small and mid-sized firms could offer banks
funding equivalent to 5 percent of their outstanding loan
"There's already a lot priced into the market and we've seen
some people lightening up positions ahead of the ECB. If they
just cut rates and do nothing more they could be met by
disappointment," said Luca Jellinek, European head of fixed
income at Credit Agricole.
SOME JUICE LEFT
In the periphery, Spanish and Italian 10-year yields were up
3-4 bps higher at 2.89 percent and 3.02 percent
respectively but still remain just above record
Investors say signs of rebounding economic growth and
accommodative central bank policy means there is still value in
the bloc's most vulnerable debt securities.
Spain's service sector expanded for the seventh month
running in May, while Italy's expanded for the second straight
month, data showed on Wednesday.
"We think there is still some juice left," said Philip
Poole, head of global research at Deutsche Asset Management.
"With the ECB introducing negative deposit rates, there is a
desire on the part of investors for yield and the periphery is
still offering decent upside."
(Additional reporting by Sujata Rao; Editing by Ruth Pitchford)