January 4, 2019 / 4:30 PM / 18 days ago

UPDATE 1-Euro zone yields jump as Fed's Powell triggers U.S. Treasury selloff

(Adds quotes, background, detail on euro zone inflation data)

By Virginia Furness and Dhara Ranasinghe

LONDON, Jan 4 (Reuters) - Euro zone government bond yields jumped across the board on Friday, extending an earlier rise, after U.S. Federal Reserve chair Jerome Powell acted to mollify financial markets concerned about a U.S. economic slowdown.

Powell said economic momentum in the United States remains solid heading into 2019 and that markets are pricing in downside risks and are “well ahead of the data”.

“The whole tone of the speech is shrugging off what markets have done, and a reaffirmation that it is the hard data that is more important,” said Peter Chatwell, rates strategist at Mizuho.

These comments, along with a barnstorming set of non-farm payroll numbers in the world’s largest economy, pushed 10-year U.S. Treasury yields 10 basis points higher - the biggest one-day rise in over two years, if it remains so.

U.S. employers hired the most workers in 10 months in December while boosting wages, pointing to sustained strength in the economy that could ease fears of a sharp slowdown in growth.

Germany’s 10-year government bond yields hit the day’s high of 0.21 percent during the speech, marking the biggest one-day yield rise in 10-year Bunds since June 2018.

These yields had already been rising off two-year lows earlier in the day, as news of a new round of trade talks between the United States and China lifted sentiment in battered equity markets, denting demand for safe-haven bonds.

Also, while data showed euro zone inflation slowing in December, core indicators remained stable, helping take the shine off the German bond market where yields have fallen sharply this week on global growth worries.

Euro zone inflation rose 1.6 percent in December on the year, slowing from 1.9 percent in November. But the core indicator - which excludes volatile energy and food prices and is watched closely by the European Central Bank - was stable at 1.1 percent in December, and in line with market expectations.

Across the bloc, most euro zone 10-year bond yields were 5-7 basis points higher on the day.

Analysts warned, however, that these yields remain compressed by historical standards.

“Levels below 30 or 20 bps suggest a risk of a crisis or that we are already in crisis mode,” said DZ Bank rates strategist Daniel Lenz, referring to German Bund yields.

In a sign of the pessimism gripping world markets at the start of a new year, two-year U.S. Treasury yields on Thursday briefly fell below 2.4 percent to reach parity with the federal funds rate.

That suggests investors doubt the U.S. central bank can continue to tighten monetary policy as its forecast implies, even if the yield was back up at 2.48 percent by Friday. (Additional reporting by Abhinav Ramnarayan Editing by Mark Heinrich)

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