* U.S. Treasury yields rise as investor sentiment brightens
* Euro zone yields come off Thursday’s lows
* Italian bond yields extend falls on expectation of TLTRO (Rewrites top to reflect change in prices)
By Abhinav Ramnarayan and Virginia Furness
LONDON, Jan 25 (Reuters) - Euro zone government bond yields rose on Friday, tracking U.S. Treasury yields higher on improved risk sentiment in the United States on the back of strong corporate earnings and the apparent willingness of policymakers to support the economy.
U.S. stocks rose on Friday as upbeat earnings reports helped investors overlook trade and growth worries, pushing yields higher as investors switched from safe haven U.S. Treasuries to equities.
Some traders said there had also been a boost from a Wall Street Journal report which said Federal Reserve officials are close to deciding they will maintain a larger portfolio of Treasury securities than they had expected.
“Economic sentiment has been deteriorating for a while now but the difference between now and December is that central banks are reacting to it,” said Mizuho rates strategist Antoine Bouvet.
“This week the BOJ, the ECB and now the Fed, it would appear, are adopting a more dovish tone or a dovish stance.”
The Bank of Japan kept monetary policy steady on Wednesday and cut its price projections, bolstering market views that it is in no position to rush an exit from its massive stimulus programme.
A day later, European Central Bank President Mario Draghi acknowledged that economic growth in the euro zone was likely to be weaker than expected due to the fall-out from factors ranging from China’s slowdown to Brexit.
Though these two bits of news pushed many euro zone yields to their lowest levels in six months and more, improved sentiment in the United States on Friday had the opposite effect, pushing 10-year yields 4 basis points higher to 2.74 percent.
German 10-year yields followed, rising 2 bps to 0.197 percent, while French 10-year yields followed, rising off an 18-month low of 0.582 percent hit earlier in the session.
“I agree it’s counter-intuitive to say this is why Treasury yields are rising (because of looser policy), but undoubtedly this is what is causing improved risk sentiment,” said Bouvet of Mizuho.
German business sentiment declined for the fifth month in a row, data showed on Friday, providing more evidence that economic growth in Germany has stalled.
The ECB governing council expects key interest rates to remain at their present levels at least through the summer of 2019. But markets have already pushed out the first hike expectations to June 2020, wrote Shweta Singh, Managing Director, Global Macro at TS Lombard, in a note published on Monday.
In addition to the scaling back of rate hike expectations, investors now expect a new round of cheap multi-year loans to banks, known as Targeted Long-Term Refinancing Operations (TLTRO), to be announced in March.
TLTROs would be especially beneficial to Italian banks, which explains the strong rally in Italian bonds, Bouvet said.
This helped the recent rally in Italian government bonds gather momentum. Italy’s 10-year bond yield fell three basis points in early trade to 2.64 percent, extending the eight basis point fall seen on Thursday to open at its lowest level since July 2018. However this had eased off as the session wore on to trade flat on the day. (Reporting by Virginia Furness Editing by Raissa Kasolowsky and Jon Boyle)