July 3, 2017 / 7:28 AM / 5 months ago

Bond bashing takes a pause as yields pull back from peaks

* Euro zone yields a touch lower

* Markets steady after last week’s beating

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

By Dhara Ranasinghe

LONDON, July 3 (Reuters) - Germany’s 10-year government bond yield pulled back from 3-1/2 month highs on Monday, as markets showed signs of stabilising from last week’s sharp selloff sparked by a growing expectation that ECB monetary stimulus could be unwound in the months ahead.

Remarks last week from European Central Bank President Mario Draghi that the central bank could make tweaks to its policy to accompany the recent economic recovery triggered the biggest weekly jump in Bund yields since December 2015.

The ECB is working on moving away from its ultra-easy monetary policy, Jens Weidmann, head of Germany’s Bundesbank and a member of the ECB’s rate-setting body, said on Saturday.

Data on Monday provided fresh signs that the euro zone economy is gaining momentum. Dutch manufacturing activity grew at its strongest rate in more than six years in June, a survey showed.

Still, in a sign that the heavy selling seen across world bond markets last week was abating for now, bond yields in the euro zone nudged 1-2 basis points lower. When a bond’s price rises, its yield falls.

In Germany, the bloc’s benchmark issuer, Bund yields edged back from 3-1/2 month highs at 0.498 percent and were down about 1 bps on the day.

“The market reaction last week was very sharp and now is probably the time to digest recent comments,” said Patrick Jacq, European rates strategist at BNP Paribas. “July could be a more supportive month for bonds as there is less supply, but clearly the trend is now upwards for yields.”

Bund yields have almost doubled within the space of a week and analysts say a break for the benchmark Bund above 0.509 percent - the high so far this year hit in March - is on the cards as investors position for tighter monetary policies inside and outside the euro zone.

U.S. Treasury yields rose to six-week highs on Friday as inflation data was not considered weak enough to delay Federal Reserve plans to hike interest rates.

Bank of England Governor Mark Carney said last week that Britain’s central bank was likely to debate a rate increase in coming months, fuelling a sell-off in global debt markets.

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; editing by John Stonestreet

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