March 20, 2014 / 8:51 AM / 4 years ago

Fed rate shift pushes euro yields up before French, Spanish bond sales

LONDON, March 20 (Reuters) - Euro zone government bond yields rose on Thursday after the U.S. Federal Reserve indicated it could raise interest rates sooner than expected, potentially taking the edge off demand at debt auctions in Paris and Madrid.

In her first press conference as the head of the U.S. central bank, Janet Yellen said the Fed would probably end its bond-buying stimulus programme this autumn and could start raising rates six months later.

The ultra-loose monetary policy in the world’s largest economy has supported investor risk appetite across the globe in recent years, helping push German Bund yields to record lows while many stock markets have hit historic highs.

“What she (Yellen) said about the first rate hike - markets certainly didn’t expect her to be so specific,” said Jussi Hiljanen, chief fixed income strategist at SEB in Stockholm.

But he said he did not expect Yellen’s comments to trigger a major trend reversal in bond yields, given low European inflation and the risk that economic data disappoints.

German 10-year Bund yields, the benchmark for euro zone borrowing costs, rose 5 basis points on the day to 1.64 percent. Most euro zone bond yields were 2-5 bps higher.

Spain is due to sell 4-5 billion euros of 2017, 2019 and 2028 bonds, with results due at around 0930 GMT. About half an hour later, France will publish the results of a sale of 7-8 billion of 2016, 2017 and 2019 fixed-rate bonds and 1.0-1.5 billion of bonds linked to French and euro zone inflation.

“We could see less demand than at previous auctions but nothing like a failed auction or anything close to it,” said Daniel Lenz, lead market strategist for the euro zone at DZ Bank in Frankfurt.

“If I was worried about something it would be more the French auction than the Spanish one,” he said, adding that in an environment where bonds were hit across the board, investors would be better off in Italy and Spain than in the core countries due to the general yield pick-up.

The initial reaction to Yellen’s signal suggested many in the market shared his view, with lower-rated bonds outperforming the top-rated ones.

French 10-year yields rose 4 bps to 2.20 percent, while Spanish and Italian yields rose 3 bps to 3.37 percent and 3.42 percent, respectively. Portuguese and Irish yields rose 1-2 bps. (Reporting by Marius Zaharia; Editing by John Stonestreet)

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