U.S. Markets

German yields up for third day on firmer U.S. yields

LONDON (Reuters) - Core European bond yields rose on Tuesday with German debt yields up for a third consecutive day on the back of firmer U.S Treasury yields and comments from a European Central bank official this week.

FILE PHOTO: Presentation of a new 2 Euro commemorative coin of former German Chancellor Helmut Schmidt in Berlin, Germany, February 2, 2018. REUTERS/Christian Mang

Germany's 10-year bond yield climbed 3 basis points on Monday, extending that rise on Tuesday to its highest in almost three weeks at 0.64 percent DE10YT=RR.

“The European Central Bank is sounding a bit more optimistic on the economy and that is pushing yields higher,” said Jason Simpson, a rates strategist at Societe Generale in London.

Despite firmer German yields, peripheral debt remained well supported with Italian bond yields IT10YT=RR pushing higher by less than 3 basis points to 1.94 percent, its highest in two months.

“Italy is quite resilient as markets are taking a wait-and see-approach on the political situation,” said Ioannis Sokos, a European rates strategist at Nomura based in London.

Italy’s 10-year bond yield gap over top-rated Germany was at its tightest in almost a week at around 129 bps.

Bank of France Governor Francois Villeroy de Galhau said on Monday the ECB could give fresh guidance on the timing of its first rate hike as the end of its exceptional bond purchases approaches.

Those comments, along with easing concerns about a global trade war and a rise in oil prices to 3-1/2 year highs, have put renewed upward pressure on U.S. and European government bond yields.

The U.S. 10-year Treasury yield traded above the 3 percent barrier in European trade US10YT=RR. It was trading at 3.0576 percent in late European trading, its highest since mid-2011.

“We have this Galhau interview and he was very much pointing to rate hikes after the end of QE (quantitative easing),” said DZ Bank rates strategist Daniel Lenz, explaining the weakness in euro zone debt markets. “And we still have a high oil price and U.S. Treasury yields above 3 percent.”

Most 10-year bond yields in the euro zone were up 1-2 basis points. But a repeat of Monday’s sharp sell off was perhaps avoided after news that powerhouse economy Germany slowed slightly more than expected in the first quarter of the year.

In Italy, investors awaited the outcome of coalition talks between the anti-establishment 5-Star Movement and far-right League, which won more time on Monday to form a government.

The prospect of a tie-up between two parties committed to big-spending policies has put upward pressure on Italian bond yields in the past week.

But the fact that 5-Star and the League need more time to reach an agreement appears to have given some comfort to bond investors with the closely-watched spread between Italian and German debt remaining around 11 bps below levels seen just before Italy’s inconclusive March 4 election.

“The (5-Star/League) program sketched out so far has raised fears of increasing deficits, but the impact on the BTP/Bund spread has been muted thus far,” ING said in a note.

Reporting by Dhara Ranasinghe; Additional reporting by Saikat Chatterjee; Editing by Catherine Evans/Keith Weir