* German two-year yields highest since late Jan
* Fed signals balance sheet cuts despite weak data
* BOE closest to voting for hike since 2007
* Greece aid on the line as Eurogroup meets
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr
(Updates prices, milestones)
By Abhinav Ramnarayan and John Geddie
LONDON, June 15 The prospect of tighter monetary
policy in the United States and Britain despite uncertainties
over their economic health reverberated across euro zone bond
markets on Thursday, sending short-dated German yields to their
highest since January.
While the interest rate hike from the U.S. Federal Reserve
was widely expected on Wednesday, policymakers gave markets a
reality check by signalling it would begin selling assets
accumulated over years of money-printing.
Euro zone government bond yields followed the overnight rise
in U.S. equivalents when trading opened on Thursday, a move
that accelerated after the Bank of England came closest to
voting for a rate hike since 2007.
Three of its policymakers backed a hike even though the
economy is showing signs of a slowdown caused by the uncertainty
of Britain's impending departure from the European Union.
British 10-year bond yields rose as much as 10
basis points on the day, while German equivalents jumped 7 basis
points to a two-week high of 0.298 percent.
Other euro zone 10-year yields were up around 3-7 basis
points on the day.
The moves were more extreme in shorter-dated bonds which
tend to be more sensitive to immediate policy changes.
Two-year German yields rose to their highest level since
late January at minus 0.632 percent. Five-year
yields shot up 9 bps -- the biggest daily jump in almost two
"It seems like there is a bit of a struggle going on among
central banks, with two major ones trying to sound hawkish,"
said Nordea chief strategist Jan von Gerich.
"You could argue that both the Fed and the BoE could have
sounded more dovish but were not."
For its part, the European Central Bank last week said it
had not discussed scaling back its stimulus programme and
lowered its inflation forecasts suggesting it was in no rush to
tighten financial conditions.
Large bond auctions by Spain and France put further selling
pressure on government bonds as investors made room for the new
Any action by major central banks such as the U.S. or the UK
tends to reverberate across the debt markets of developed
countries, as many investors have European, U.S. and Japanese
government bonds in their portfolio and switch between them when
there are changes in yields.
The Fed's move had been more surprising as it came directly
after inflation and retail sales data in the United States that
had pushed U.S. yields to a seven-month low and nudged other
In Europe, Germany's 10-year yield hit a seven-week low of
0.225 percent on Wednesday, before it snapped back sharply after
"The Fed has taken a cautious approach to balance sheet
normalisation, but they have begun it and it's definitely a
tightening of policy," said ING strategist Martin van Vliet.
"The meeting was definitely tilted towards the hawkish
Greek government bond yields were a touch higher as its
international lenders prepared on Thursday to unblock as much as
8.5 billion euros in loans that Athens desperately needs next
month to pay its bills, and to give some idea of what debt
relief they may offer over the long-term.
The chairman of euro zone finance ministers Jeroen
Dijsselbloem told reporters the size of the payment to Athens
would be discussed during the meeting, since lenders agreed that
Greece had pushed through all the requested reforms.
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
(Additional reporting by Dhara Ranasinghe; Editing by Pritha
Sarkar and Keith Weir)