* German-peripheral yield gap hits one-week high
* German Bund yield early hit 7-week high at 0.46 pct
* Constancio pours cold water on ECB policy shift bets
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr
(Recasts, adds quote, updates prices)
By Jemima Kelly and Dhara Ranasinghe
LONDON, May 11 The gap between the yields on
German 10-year bonds and those of Spanish and Italian
equivalents hit its widest in a week on Thursday, as investors
sold out of risky assets on worries over tensions between North
Korea and the United States.
The benchmark 10-year Bund yield had risen to
0.46 percent earlier in the day, its highest in seven weeks, as
a spike in oil prices reinforced expectations that a pick-up in
inflation could encourage the European Central Bank to step back
from its ultra-loose monetary policy.
But as oil prices came off their highs later in the day, and
after North Korea said it had a sovereign right to "ruthlessly
punish" American citizens it has detained for crimes against its
government system, investors bought back into safe-haven German
debt, nudging the yield down to around 0.43 percent.
Riskier peripheral yields climbed, with the spread between
Italian 10-year government debt and the German
equivalent hitting 50 basis points for the first time in a week.
German Bund yields had earlier been given a brief lift,
along with Treasury yields, by strong U.S. producer price
inflation data and a fall in jobless benefit claims. That
pointed to a tightening labour market and rising inflation that
could spur the Federal Reserve to raise interest rates in June.
"Equities are softer, Treasury yields are down a basis
point, and Bund yields are flat across the curve," said Rabobank
rates strategist Richard McGuire. "Peripheral spreads are a bit
wider which would be consistent with the risk-off tone."
Oil prices had earlier jumped as much as 1.5 percent, adding
to a 3 percent-plus overnight gain, their biggest one-day jump
since Dec. 1, following a steep drop in U.S. inventories and a
bigger-than-expected cut in Saudi supplies to Asia.
That rally has helped boost the market's long-term euro zone
inflation expectations, with the five-year, five-year, breakeven
forward rising to almost 1.65 percent from a low on Monday just
below 1.60 percent.
Analysts say the path for bond yields has turned higher as
fading political risks and stronger data fuel talk that the
European Central Bank could signal a policy shift when it next
meets in June.
"What happens to oil and other commodities is very important
going forward in determining the inflation profile," said Chris
Scicluna, head of economic research at Daiwa Capital Markets.
"Clearly we've had a trend in place in yields for some time,
with political risk being taken off the table after French
elections, a steady stream of stronger data and the ECB expected
to change its forward guidance in June."
ECB policymaker Vitor Constancio poured cold water on
expectations for an imminent scaling-back of monetary stimulus,
however, saying that keeping policy ultra-loose for longer is
the safer way for the ECB to avoid the economy from turning
German 30-year bond yields hit their highest level since
mid-March at around 1.25 percent.
Medium- and long-term German bond yields have risen roughly
30 bps in the past three weeks, a period that coincides with the
conclusion of the French presidential election, a pick-up in
global risk appetite and a shift in focus to the timing of U.S.
rate hikes and the ECB's next move.
Elsewhere, Italy sold just over 7 billion euros of
government debt, while the Bank of England said interest rates
were unlikely to rise any time in the next two years.
For Reuters Live Markets blog on European and UK stock
markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets
(Reporting by Dhara Ranasinghe and Jemima Kelly; Editing by