February 2, 2018 / 11:52 AM / in a year

UPDATE 1-Euro zone bond sell-off gets fresh legs as U.S. 10-year hits 2.80 pct

* German 10-yr yields hit highest since Sep 2015

* U.S. yields spike as rate hikes expected

* Payroll data could confirm trend

* Nowotny says QE should end now, but decision in September

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices, adds quote)

By Abhinav Ramnarayan and Fanny Potkin

LONDON, Feb 2 (Reuters) - Euro zone bond yields hit multi-year highs on Friday before the United States releases employment data that’s expected to bolster expectations U.S. interest rates will rise.

Investors have been shedding euro zone bonds this year as a booming European economy heightens expectations the European Central Bank will tighten monetary policy.

News from the U.S. is giving the sell-off fresh impetus.

“Bunds remain vulnerable as U.S. headwinds look set to persist ahead of today’s (employment) data,” Commerzbank analysts said in a note.

A Reuters poll forecast the United States added 180,000 jobs in January, an increase from 148,000 the month before.

The yield on 10-year Treasuries climbed to their highest since April 2015 at 2.80 percent in European trade on Friday.

Euro zone government bond yields also rose, adding 3 to 4 bps across the board. The yield on Germany’s 10-year government bond reached its highest since September 2015 at 0.75 percent. ECB rate-setter Ewald Nowotny may also have put upwards pressure on yields. The policymaker said on Thursday that he believed the ECB’s asset-purchase programme should be stopped now, but a decision on the programme will only be reached by September

ING strategist Benjamin Schroeder said “yields have been rising since the ECB meeting and now hawks like Nowotny are saying this is the right time to talk about the end of QE and that adds to the move.”

The gap between the U.S. and German benchmark yields was at elevated levels at 206 basis points.

Meanwhile, 10-year British government yields were at their highest level since May 2016 at 1.59 percent, up 5 bps on the day.

“We do not see any support for U.S. Treasuries here other than domestically, if U.S. equities weaken,” said Peter Chatwell, Mizuho’s head of rates strategy.

“On the other hand, higher yields will increase euro buying and will also make European government bonds more attractive for foreign investors, causing them to continue their outperformance of USTs.”

The gap between low-rated Southern European debt and the German benchmark bonds widened from the tight levels seen on Thursday.

The Spain-Germany 10-year government bond yield spread, for example, grew to 71 bps from 67 bps the day before, the smallest the gap has been since March 2010 .

Bank of America Merrill-Lynch’s indicator of market sentiment hit a “sell” signal pointing to a downturn for risk assets, the bank’s strategists said on Friday.

Reporting by Abhinav Ramnarayan, editing by Larry King

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