May 15, 2018 / 7:39 AM / 2 months ago

UPDATE-1-Euro zone bond markets on the back foot thanks to ECB, oil

* Recasts, writes through

* Bond yields creep for third day

* Sentiment turns bearish

* Italian bond yields fall after early rise

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

By Dhara Ranasinghe

LONDON, May 15 (Reuters) - Borrowing costs in the euro area edged higher for a third straight day on Tuesday, pushed up by surging oil prices, rising U.S. government bond yields and perceived hawkish comments this week from a European Central Bank official.

Germany’s 10-year bond yield jumped 6 basis points on Monday, extending that rise in early Tuesday trade to its highest in almost three weeks at 0.63 percent.

Long-dated bond yields in Italy briefly rose to their highest in almost two months before falling.

Bank of France Governor Francois Villeroy de Galhau said on Monday the ECB could give fresh guidance on the timing of its first rate hike as the end of its exceptional bond purchases approaches.

Those comments, along with easing concerns about a global trade war and a rise in oil prices to 3-1/2 year highs this month, have put renewed upward pressure on U.S. and European government bond yields.

The U.S. 10-year Treasury yield was hovering above the key 3 percent barrier on Tuesday.

“We have this Galhau interview and he was very much pointing to rate hikes after the end of QE (quantitative easing),” said DZ Bank rates strategist Daniel Lenz, explaining the weakness in euro zone debt markets. “And we still have a high oil price and U.S. Treasury yields above 3 percent.”

Most 10-year bond yields in the euro zone were up 1-2 basis points, drawing some support from news that powerhouse economy Germany slowed slightly more than expected in the first quarter of the year.

In Italy, investors awaited the outcome of coalition talks between the anti-establishment 5-Star Movement and far-right League, which won more time on Monday to form a government.

The prospect of a tie-up between two parties committed to big-spending policies has put upward pressure on Italian bond yields in the past week.

But bond investors appeared to draw some comfort from the fact that 5-Star and the League need more time to reach an agreement.

Italy’s 10-year bond yield was down marginally at 1.91 percent, having briefly hit a new high, pushing the yield gap over German peers to its tightest in almost a week at around 128 bps.

That closely-watched spread remains around 11 bps below levels seen just before Italy’s inconclusive March 4 election.

“The (5-Star/League) programme sketched out so far has raised fears of increasing deficits, but the impact on the BTP/Bund spread has been muted thus far,” ING said in a note. (Reporting by Dhara Ranasinghe Editing by Catherine Evans)

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