* Bond yields up 2-6 bps, inflation expectations at 11-month high
* Oil-price surge after OPEC deal stokes inflation bets
* Austria seeks approval for debt issuance of up 100 years
* France, Spain hold auctions; Italy counts down to referendum
* Graphic: tmsnrt.rs/2fPTds0 (Updates prices, adds graphic)
By Dhara Ranasinghe
LONDON, Dec 1 (Reuters) - German government bond yields rose to their highest level in two weeks on Thursday, as a surge in oil prices following the first output cut by major oil producers since 2008 and fresh signs of a rebound in the global economy boosted inflation expectations.
Austria was in focus after news that it has started the legislative process to allow debt issuance of up to 100 years, while a reluctance by investors to push Italian government bond prices much lower ahead of a referendum on Sunday limited selling in the southern European market.
For now, a deal by the Organization of the Petroleum Exporting Countries and Russia to reduce output to drain a global supply glut grabbed the market’s attention, lifting euro zone bond yields 2-6 basis points higher.
The news, which sent oil prices to six-week highs, comes as markets reassess the outlook for inflation and growth following the election of Donald Trump as next U.S. president.
Signs of stronger growth globally renewed “reflation trades” that had slowed in recent sessions as investors awaited further details of Trump’s economic agenda.
Euro zone manufacturers enjoyed their best month in November since the start of 2014, a survey showed. Also on Thursday, a survey revealed China’s factories notched up their strongest activity in two years, while data on Wednesday showed that U.S. private employers stepped up hiring in November and consumer spending increased last month.
“We’ve had spike in oil prices, plus better data, so we’re seeing the reflation trade come back,” said Martin van Vliet, senior rates strategist at ING.
Germany 10-year Bund yields hit a two-week high of 0.35 percent, while 30-year bond yields rose 10 bps to 1.03 percent.
A market measure of euro zone inflation expectations, the five-year, five-year breakeven forward, rose to an 11-month high above 1.64 percent.
Austria has started the legislative process to permit debt issuance of up to 100 years in maturity and could sell a bond next year, a treasury spokesperson told Thomson Reuters’ markets news service IFR on Thursday.
The country has submitted a draft law to parliament, which will be debated until mid-January, in news that highlights a growing interest in ultra-long bond issuance.
Italy, Spain, France and Belgium have all sold 50-year bonds this year via syndications, where banks place the bonds with a wide group of investors, while Belgium and Ireland issued 100-year paper in smaller private placements.
Austria itself sold 2 billion euros of 70-year bonds earlier this year.
On Wednesday, Steven Mnuchin, Donald Trump’s nominee to run the U.S. Treasury Department, said he will explore issuing debt maturing in more than 30 years.
Both France and Spain sold bonds on Thursday.
The sell-off in euro zone bonds dragged 10-year bond yields in Italy back above 2 percent.
But analysts said that with a 'No' vote in Sunday's referendum on constitutional change now largely priced into markets, there was a reluctance to push Italian yields much higher for now. Prime Minister Matteo Renzi has staked his future on a 'Yes' vote, but opinion polls have been pointing in the other direction. (Graphic: tmsnrt.rs/2fIcq0j)
A report this week that the European Central Bank is ready to step up purchases of Italian government bonds temporarily if the referendum result sharply drives up borrowing costs has also helped stabilise the bond market.
HSBC said that fears of political upheaval were overstated. It described Italian yields above 2 percent as “attractive” and said a 10-year Spanish/Italian yield gap of around 50 bps reflected that a ‘No’ vote was priced in by markets.
“We ... stay overweight 10-year Italy versus Spain, looking for the spread to tighten post referendum as some of the uncertainty premium is priced out,” HSBC said in a note. (Reporting by Dhara Ranasinghe; Editing by Andrew Heavens and Susan Thomas)