* Euro zone bond yield down 1-2 bps
* Fed chair confirms outlook for steady rate hikes
* Trade subdued due to UK bank holiday
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr
By Dhara Ranasinghe
LONDON, Aug 27 (Reuters) - Government bond yields in the euro area fell on Monday after U.S. Federal Reserve chief Jerome Powell confirmed the outlook for steady rate increases in the world’s biggest economy.
A pick-up in risk appetite helped by progress in U.S. and Mexican talks on squaring away bilateral differences on the North American Free Trade Agreement lifted sentiment towards lower-rated debt markets including Italy, although trade was subdued due to a public holiday in Britain.
Speaking at the Jackson Hole symposium on Friday, Powell defended the Fed’s push to raise rates as healthy for the economy and signalled more hikes were coming despite President Donald Trump’s criticism of higher borrowing costs.
By suggesting the Fed remained on the path for steady rate hikes, Powell’s comments were taken as a reassuring sign by investors.
“Powell’s speech was interpreted as dovish, although I think there were some hawkish elements to it,” said Jan von Gerich, chief analyst at Nordea in Helsinki. “There’s nothing in his comments that would have changed the outlook materially.”
The Fed, which began to tighten monetary policy in 2015, has raised rates twice this year and is expected to do so again in September and December.
With benchmark U.S. Treasury yields slightly lower on Monday, euro zone bond yields also fell.
Germany’s 10-year Bund yield was down 1.5 basis points at 0.33 percent, below more than two-week highs hit on Friday.
Other 10-year bond yields in the single-currency bloc also fell 1-2 bps on the day, with Italian bonds benefiting from the pick-up in risk appetite in world markets .
The gap between Italian and Spanish bonds last week widened out to levels not seen since 2012 against a backdrop of rising concerns about the policies of Italy’s anti-establishment coalition government.
A flare-up last week between Rome and the European Commission over migrants has renewed concerns about their relationship.
Analysts said a bond sale from Italy on Thursday could prove a key barometer of sentiment.
“The resumption of BTP auctions after the summer hiatus will serve as a key test this week but should be cushioned by sizable coupons,” analysts at Commerzbank said in a note. (Reporting by Dhara Ranasinghe; editing by John Stonestreet)