March 12, 2018 / 8:40 AM / 6 days ago

German bond yields dip after ECB's Coeure sees rates at very low levels

* ECB’s Coeure sees rates staying at “very low levels”

* Over 20 bln euros of bond supply due this week

* Euro zone periphery govt bond yields

By Dhara Ranasinghe

LONDON, March 12 (Reuters) - German bond yields held within sight of recent lows on Monday after ECB executive board member Benoit Coeure said short-term interest rates are to stay at “very low levels”, supporting a view that any exit from stimulus will be slow.

A hefty week of euro zone bond supply put some upward pressure on borrowing costs, although Coeure’s comments early on Monday helped underpin sentiment. He added that inflation was not quite where the European Central Bank “would like it be.”

Germany’s benchmark 10-year bond yield was steady at 0.65 percent and not far off five-week lows hit last week at around 0.60 percent. German short-dated bond yields dipped, while yields on other higher-rated bonds were also little changed .

Last week, the ECB gave up a pledge to increase bond buys if needed but signalled a slow route out of its massive stimulus.

According to a source-based story on Friday, ECB staff offered policymakers meeting last week a scenario where interest rates would be raised in mid-2019 after winding down their bond purchases at the end of this year.

A perception that the ECB’s exit from its 2.55 trillion euro stimulus will be slow has underpinned euro zone bonds even as Friday’s strong U.S. jobs data supports a view that the U.S. Federal Reserve on track to raise rates again this month.

That’s added to a divergence between U.S. and European rate views, reflected by a widening in the difference between U.S. and German bond yields.

The U.S./German 2-year yield spread was at 282 basis points, , close to its widest in over 20 years. The gap between 10-year U.S. and German bond yields was at 226 bps and hovering close to its widest in around 14 months .

“The lack of reaction to the strong U.S. jobs report in European fixed income is a sign that the ECB meeting last week, by showing no inclination to rush toward the exit, has given fresh legs to the U.S.-Europe divergence trade,” said Mizuho rates strategist Antoine Bouvet.

Most other euro zone bond yields crept higher as investors braced for bond supply from the Netherlands, Italy, Germany, Portugal, France and Spain. Between them, analysts estimate that up to 30 billion euros of bonds will be auctioned.

Analysts said uncertainty over the make-up of the next Italian government after an inconclusive March 4 election was starting to weigh on Italian bonds.

The Italian/German 10-year yield gap was at 138 bps versus 135 bps on Friday.

“It is an open race as to who will form the next Italian government and this uncertainty is starting to weigh on spreads,” said DZ Bank rates strategist Daniel Len. (Reporting by Dhara Ranasinghe; Editing by Toby Chopra)

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