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UPDATE 2-Euro zone bond yields rise, Italy rating review looms
January 13, 2017 / 12:37 PM / a year ago

UPDATE 2-Euro zone bond yields rise, Italy rating review looms

* Bonds sell off after U.S. policymakers hint at tightening

* Focus on Italy as crucial review by DBRS looms

* Credit Agricole to cease primary dealerships in Austria, Ireland (Updates prices, adds comments)

By Abhinav Ramnarayan

LONDON, Jan 13 (Reuters) - Euro zone bond yields rose on Friday after comments from U.S. policymakers prompted concerns that the United States’ monetary policy could tighten faster than previously expected.

Federal Reserve officials said on Thursday that fiscal and tax plans sketched out by the incoming Trump administration could trade a short-term economic boost for inflation and debt problems they might have to counteract.

The rise in euro zone bond yields gathered pace as U.S. Treasuries came under selling pressure on Friday. Ten-year Treasury yields rose 5 basis points to 2.41 percent, roughly 10 bps above more than one-month lows hit on Thursday.

Euro zone bond yields, which typically move in sympathy with U.S. Treasury yields as many investors invest in both, rose 1-5 bps across the board.

Germany’s 10-year bond yield, the benchmark for the region, climbed 3.5 bps to 0.27 percent -- heading back towards recent three-week highs at around 0.33 percent. Thirty year bond yields rose to a one-month high at 1.11 percent.

“There does appear to be a more risk-on move in markets today and that helps explain the rise in bond yields,” said Rabobank’s head of rates strategy Richard McGuire, noting the rally in U.S. stock markets after upbeat earnings results from banks such as JP Morgan and Bank of America on Friday.

European stock markets closed higher.

Earlier in the day, Chinese data helped limit the rise in bond yields.

China’s massive export engine sputtered for the second year in a row in 2016, with shipments falling in the face of persistently weak global demand and officials voicing fears of a trade war with the United States that is clouding the outlook for 2017.

“The picture is a little bit mixed but the overall tone of the Fed speakers was more hawkish, that’s probably why we are seeing yields move to the upside today,” said DZ Bank strategist Daniel Lenz.

“But the Chinese export data is poor, and that should put a cap on the move,” he said.

Attention meanwhile turned to a crucial review of Italy’s credit rating by DBRS later on Friday.

The Canadian agency is one of the four used by the European Central Bank and a downgrade would see the ECB increase the ‘haircut’ it applies to Italian bonds, piling extra stress on the country’s banks that rely on its interest-free funding.

The yield on Italy’s 10-year government bond was at 1.09 percent, up 1.5 bps on the day.

In related news, Credit Agricole’s investment banking arm said on Friday it had decided to cease acting as a primary dealer in government bonds for Austria and Ireland, and in treasury bills for the Netherlands.

The bank is the latest to have given up primary dealer roles in Europe, a trend that threatens to increase liquidity constraints and could eventually make it more expensive for some countries to borrow.

Additional reporting by Dhara Ranasinghe; Editing by Andrew Heavens and Toby Chopra

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