July 11, 2017 / 7:34 AM / 12 days ago

Euro zone yield rise resumes as focus shifts to Fed's unwind

4 Min Read

* Fed's Brainard to speak on normalising balance sheet

* Yellen due to give semi-annual testimony on Wednesday

* ESM urges Greece to ready market borrowing strategy

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

By John Geddie

LONDON, July 11 (Reuters) - Euro zone bond yields resumed their march upwards on Tuesday as focus shifted to the pace of monetary tightening in the world's largest economy and when the U.S. central bank might start unwinding its massive balance sheet.

Yields across the bloc fell on Monday, retracing some of a sharp rise seen over the last two weeks in which the benchmark German 10-year yield has more than doubled on the growing view the European Central Bank will begin reining in its ultra-loose policy sooner rather than later.

The ECB's Benoit Coeure is due to speak on Tuesday but analysts said they are most interested in a speech by Fed Governor Lael Brainard on the topic of normalising central banks' balance sheets, while Fed chair Janet Yellen's semi-annual testimony to Congress follows on Wednesday.

San Francisco Federal Reserve Bank President John Williams said earlier on Tuesday in Sydney that he expected the Fed to start unwinding its massive balance sheet in the next few months and for it to raise rates one more time this year.

"Given the recent sensitivity to central bank talk about unwinding emergency stimulus, today's speech by the Fed's Brainard...looks like a compelling read before Yellen's testimony moves into focus tomorrow," said Padhraic Garvey, global head of debt and rates strategy at ING.

Germany's 10-year yield edged up 2 basis points on Tuesday to 0.56 percent, reversing some of a near 4 basis point fall on Monday, which was the biggest daily drop in around a month.

That drop appears to have been just a pause in a sell-off that has seen Germany's 10-year yield more than double from the 0.25 percent it was at on June 27, the day ECB President Mario Draghi hinted at the possibility of tweaking the central bank's aggressive stimulus in a speech in Sintra, Portugal.

The yield remains within touching distance of an 18-month high of 0.583 percent hit in early trading on Monday.

All other euro zone bond yields were up 1-5 bps on the day, with Portuguese equivalents leading the charge, up 5 bps at 3.18 percent.

Greek yields held near an eight-year low as its main creditor encouraged the country to return to financial markets and raise private finance before its bailout programme ends in a year's time.

European Stability Mechanism head Klaus Regling said on Monday it was important for Greece to "develop a strategy to go back" given other countries - Ireland, Portugal and Cyprus - had returned to markets "well before" the end of their programmes, in order to avoid a possible gap in funding.

Greece could issue its first sovereign bond in three years as early as this month, sources familiar with Athens' plan told Reuters in May.

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

Editing by Hugh Lawson

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