April 24, 2018 / 11:42 AM / 6 months ago

UPDATE 1-Euro zone yields steady but U.S. Treasury landmark hangs over market

* Bond yields off highs as business sentiment declines

* But U.S. 10-year yields hover near landmark 3 pct level

* Italy/Germany spreads still tight ahead of ECB meeting

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Writes through)

By Abhinav Ramnarayan

LONDON, April 24 (Reuters) - Euro zone government bonds steadied on Tuesday as the prospect of heavy debt redemptions and a weaker economic climate countered the effect of rising U.S. Treasury yields.

A survey by Germany’s Ifo Institute on Tuesday morning showed business confidence deteriorated for a fifth consecutive month in April in Europe’s biggest economy, in a further sign that it is losing some of its growth momentum.

However, analysts warned that all bets are off if 10-year U.S. Treasury yields hit 3 percent, having come within a sliver of touching that psychologically important landmark on Monday.

“Apart from the supply-demand imbalance, the Ifo survey underscores what we’ve identified before as a decline in economic sentiment in the euro zone that should support the market indeed,” said Commerzbank strategist Christoph Rieger.

Euro zone borrowing costs were flat to a touch higher across the board, with the yield on 10-year German Bunds - the benchmark for the bloc - unchanged at 0.63 percent.

The yield on the euro zone’s benchmark bond has risen by about 10 basis points over the past week, pulled up by rising U.S. Treasury yields.

On Wednesday, the yield on 10-year U.S. borrowing costs were at 2.975 percent and with oil prices climbing above $75 a barrel for the first time since late 2014, a rise to 3 percent cannot be ruled out.

“Whether this will mark the beginning of a new range or the start of a bear market is the question; or whether it’s a welcome buying opportunity,” said Rieger of Commerzbank.

Any rise in U.S. Treasury yields are likely to act as a “magnet” and pull euro zone yields higher, he said.

Meanwhile, the market is also gearing up for Thursday’s European Central Bank meeting, with investors hoping to get some inkling of how concerned policymakers are about the dulling of economic sentiment in the bloc.

Any increase in concern should push rate hike prospects out further and the potential for asset purchases to continue until the end of the year.

In fact ECB rate-setter Francois Villeroy de Galhau on Tuesday warned that the uncertainty being generated by U.S. trade tariffs is already hurting investment globally and could seriously damage growth.

In recent weeks, peripheral government bonds - seen as beneficiaries of the ECB’s bond-buying scheme - have performed strongly compared to better-rated peers.

Italy’s 10-year government bond yield spread over Germany is close to its tightest level since August 2016 at 116 basis points, despite the political uncertainty in that country following the March general election.

The spread over neighbouring Spain - another closely watched metric seen as a proxy for investor sentiment towards the bloc - briefly touched its tightest level since mid-January.

Italy’s president on Monday asked the head of the lower house of parliament to see whether the 5-Star Movement and centre-left Democratic Party (PD) could form a coalition government but initial reaction suggested that would be an unlikely match. (Reporting by Abhinav Ramnarayan Editing by Andrew Heavens and Hugh Lawson)

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