July 9, 2018 / 11:05 AM / 3 months ago

UPDATE 2-Euro zone bond yields creep up as investors buy stocks

* Bond yields edge up across board

* Mario Draghi says confidence in inflation path rising

* Hefty week for euro debt supply;

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

By Dhara Ranasinghe

LONDON, July 9 (Reuters) - Government bond yields in the euro area crept up on Monday, giving up declines seen after Friday’s U.S. non-farm payrolls data, as a stronger tone in world equity markets diminished the appeal of fixed income.

Global as well as European stocks are broadly higher after U.S. job numbers revealed tepid wage inflation in June as it tempered some expectations that U.S. interest rates could rise faster than is priced by markets.

Having slipped to five-week lows on Friday, Germany’s 10-year bond yield rose 1.7 basis points to 0.307 percent , shrugging off ECB President Mario Draghi’s comment that the bank’s confidence in the inflation path was rising.

Most euro zone 10-year bond yields were 1-2 bps higher on the day, with the exception of Italy, which tends to benefit when demand for riskier assets grows. Ten-year Italian yields slipped more than four bps at one point.

“Risk appetite has been good and you can see that from BTP spreads which have squeezed in tighter,” Mizuho strategist Peter Chatwell said, referring to Italian government bonds.

“It’s becoming difficult for investors to maintain short or underweight positions in BTPs ... we expect to see more investors to come reluctantly back into the market.”

Bund yields rose briefly to a session-high of 0.322 percent as Draghi said the ECB’s measures were “playing a decisive role” in bringing inflation back on track to hit targets but eased on back of a wobble in British markets following the resignation of foreign minister Boris Johnson.

British 10-year yields slipped after the resignation, standing flat on the day after earlier rising to two-week highs

Euro zone yields have been generally depressed after the ECB said last month that interest rates would stay low through the summer of 2019.

In a sign of some reluctance to hold safe-haven German bonds, official data showed Japanese investors sold a net 712.1 billion yen ($6.45 billion) of the bonds in May, their largest net sales in more than a year.

That selling followed a rally in German and U.S. government bonds on political upheaval in Italy in late May.

German 10-year bond yields are down 50 bps from almost 2 1/2-year highs hit in February, on expectations that interest rates in the euro zone will stay low for some time, slowing momentum in economic growth and trade war jitters that have boosted demand for safe-haven assets.

“The path of least resistance is for yields to go higher as a lot of negative news has now been priced in,” said Nick Gartside, international CIO of fixed income at JPMorgan Asset Management.

A weaker tone in most euro zone debt markets on Monday also came as markets braced for bond sales from Germany, the Netherlands, Ireland and Italy this week. The bulk of that issuance is in longer-dated maturities.

“What’s happening from a duration perspective is that supply pressure is building up in the European market,” Chatwell said, noting the bond auctions as well as syndicated bond issues due this week.

Reporting by Dhara Ranasinghe, editing by Larry King, William Maclean

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