* Investors take cue from policymaker caution on recovery
* German bond yields well below recent highs at 0.36 pct
* Political hurdles remain after French election
* Euro zone periphery bond yields tmsnrt.rs/2ii2Bqr
By Abhinav Ramnarayan
LONDON, May 26 An undercurrent of political and
policy risks pushed down euro zone government bond yields on
Friday, discouraging investors from putting too much faith in
improved economic data.
Despite a market-friendly result in the French presidential
election and strong recent inflation and private sector activity
numbers from the bloc, most euro zone bond yields are well below
Germany's 10-year government bond yield, the benchmark for
the region, fell 4 basis point to a one-week low of 0.32 percent
-- comfortably above the 0.20 percent level at the start of the
year but well below the 0.51 percent March high.
Most other euro zone yields were 2-4 bps lower on the day,
with Belgium's 10-year yield hitting a four-month low of 0.684
Investors took their cue from policymakers staying cautious
on the brightening political and economic picture in Europe and
its implications for monetary policy.
"We have had a few positive political outcomes, but we still
have Brexit negotiations to come, Italian and German elections,
a potential Catalonia (independence) referendum and the
unpredictable factor of Donald Trump's presidency," ING
strategist Padhraic Garvey said.
"So even though we are moving towards higher rates in the
U.S. and tapering in Europe, in general policymakers are being
A survey showed this week that businesses across the euro
zone maintained April's strong growth rate in May, pointing to
0.7 percent economic growth in the second quarter.
But top European Central Bank officials made it clear they
would not favour changing the policy path they had already
U.S. Federal Reserve minutes this week showed policymakers
agreed to hold off on raising interest rates until it was clear
a recent U.S. economic slowdown was temporary.
Data on Friday showed gross domestic product increased at a
1.2 percent annual rate in the first quarter, instead of the 0.7
percent pace reported last month.
Expectations the Fed will run down its balance sheet were
also exerting downward pressure on yields, said Rabobank
strategist Richard McGuire.
"As the Fed appears to be on course on balance sheet
normalisation, that possibly adds to the bullish outlook for
U.S. Treasuries as they presumably won't hike rates at the same
time they are reducing the balance sheet," he said.
Ten-year U.S. Treasury yields dropped as much as
2 basis points to 2.23 percent while volatility in Treasuries
hit a 3-year low, after the minutes signalled a steady,
predictable balance sheet rundown.
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 Abhinav Ramnarayan; Editing by Angus MacSwan,
John Stonestreet and Pritha Sarkar)