April 25, 2018 / 7:28 AM / 7 months ago

U.S. bond selloff drags euro zone borrowing costs higher

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

By Dhara Ranasinghe

LONDON, April 25 (Reuters) - Bond yields in the euro area rose on Wednesday as a selloff in U.S. Treasuries gathered pace, although a looming European Central Bank meeting injected a note of caution into regional debt markets.

The benchmark U.S. 10-year Treasury yield pushed further past 3 percent in early European trade, having broken the key level on Tuesday as a strong U.S. economy stoked expectations that a three-decade long bond-bull market is nearing an end.

Rising benchmark Treasury yields, used as a global yardstick for interest rates on everything from home loans to corporate bonds, dragged euro zone equivalents higher once more.

But analysts said they expected any selling in Europe to be limited a day ahead of the ECB meeting.

Germany’s benchmark 10-year bond yield rose 1.5 basis points to 0.65 percent, close to six-week peaks hit a day earlier. Other euro zone bond yields were 1-2 bps higher on the day.

The ECB is not expected to make any significant changes to its monetary policy outlook on Thursday but its comments will be followed closely for further guidance on the timing of a scaling-back of massive monetary stimulus.

In particular focus is what ECB chief Mario Draghi has to say about a recent softening in euro zone economic data, which has prompted investors to push back expectations for a rate rise further into 2019.

Money market pricing suggests that investors expect the ECB to deliver its first hike in this economic cycle by June 2019, having pushed back expectations from early next year. tmsnrt.rs/2HKfMx2

“The main focus will be on the weakness in the euro zone data in the early part of the year,” said Seamus Mac Gorain, fixed income portfolio manager at JPMorgan Asset Management.

“But there is no clear reason for the ECB to change the message. They are on a path to ending asset purchases and we think that will happen by the end of the year.”

Italian bonds continued their outperformance on hopes of progress to end the political deadlock that has followed last month’s inconclusive election.

Italy’s anti-establishment 5-Star Movement opened the door on Tuesday to coalition talks with the centre-left Democratic Party.

The yield premium investors demand to hold Italian 10-year bonds over top-rated German peers extended its falls to around 112 bps — the lowest in two years.

The gap between Italian and Spanish bonds was at 47 bps and close to its tightest levels since January.

Reporting by Dhara Ranasinghe Editing by Catherine Evans

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