December 19, 2019 / 10:48 AM / a month ago

UPDATE 3-German Bund yield hits new 6-month high as Sweden ends negative rates

* German Bund yields rise to new six-month high

* Riksbank raises rates to 0%, ditches negative rates

* Inflation expectations gauge jumps to almost 5-month high

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds Italian yields, latest prices)

By Dhara Ranasinghe

LONDON, Dec 19 (Reuters) - German 10-year bond yields rose to six-month highs on Thursday, as Sweden ended five years of negative interest rates - reinforcing a sense in markets that major central banks may be done with pushing borrowing costs further below zero.

Sweden’s central bank, the Riksbank, raised its benchmark repo rate by a quarter point to zero despite a slowdown in the economy and global uncertainty to draw a line under an era of negative rates.

It becomes the first of the central banks that cut rates below zero to inch back to what was long considered the floor for rates. Policy rates are still negative at the European Central Bank and the Japanese, Danish, Swiss and Hungarian central banks.

“The Riksbank is moving away from negative rates, and in the markets’ mind this is something that the ECB could try at some point,” said Peter McCallum, rates strategist at Mizuho.

The ECB cut its deposit rate by 10 basis points to -0.5% in September.

Markets swiftly moved to erase bets on further rate cuts . Central bank commentary suggested there was little appetite for further easing and it was time for governments to raise fiscal spending to lift growth and inflation.

Bond yields rose across the euro zone, with those in higher-rated countries such as Germany, France and the Netherlands up 3-4 bps .

Germany’s benchmark 10-year bond yield rose to a new six-month high of -0.208%, pushing past Friday’s peak marked after the decisive election victory of Britain’s Conservative Party.

A key gauge of long-term euro zone inflation expectations climbed above 1.33% to its highest since late July. It remains below the ECB’s inflation target - close to but less than 2% - but shows a recovery in expectations from record lows earlier this year around 1.12%.

That rebound coincides with improved economic data and signals from major central banks that they are on pause for now.

The Bank of Japan on Thursday suggested it was in no hurry to boost stimulus. The Bank of England also kept rates on hold.

“The BOJ left policy unchanged, but its statement suggests they want a steeper (yield) curve so this may have had a knock-on effect on euro zone bond markets,” said Christoph Rieger, head of rates at Commerzbank.

“It fits very well into the theme of easing fatigue among central banks and falls on fertile ground, given that we have a trade truce, Brexit uncertainty has ebbed and we have better data.”

Germany, the euro zone’s benchmark bond issuer, released its debt issuance plans for 2020. It said it will tap the sustainable-finance market by issuing its first “green bond” in the second half of next year, a move markets had expected.

Italian yields jumped across the curve, with the 10-year bond yield last up nearly 8 basis points at 1.416%.

Analysts said the outsize Italian move was part of the broader shift higher in euro zone yields. Italian yields tend to be more volatile than their peers.

Reporting by Dhara Ranasinghe Additional reporting by Tommy Reggiori Wilkes Editing by Larry King, Kirsten Donovan

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