April 16, 2018 / 10:29 AM / a year ago

UPDATE 2-Euro zone bond yields hover at three-week highs as Syria fears ease

* Euro zone bond yields rise

* Moody’s upgrades Spain by one notch

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices)

By Dhara Ranasinghe

LONDON, April 16 (Reuters) - Borrowing costs in the euro zone rose to three-week highs on Monday, with demand for fixed income dented as appetite for risk assets was supported by hopes that a U.S.-led strike on Syria would not escalate into a broader conflict.

The premium investors demand for holding Spanish government bonds over German peers fell to a one-week low after ratings agency Moody’s upgraded Spain’s ratings on Friday, marking the third upgrade for the southern European state this year.

But the overall tone in bond markets was bearish, with yields on short-dated U.S. Treasuries rising to their highest level for almost a decade.

“There is a feeling (in the market) that there will be no follow-up action,” Rabobank fixed income analyst Lyn Graham-Taylor said, referring to the Western missile strikes in Syria.

Across the single currency bloc, 10-year bond yields were up 1-2 basis points (bps) on the day.

Germany’s benchmark Bund yield climbed by 3 bps to 0.55 percent, its highest for more than three weeks, before easing to 0.525 by the end of trading.

Ten-year bond yields in France, Austria and the Netherlands also touched their highest in about three weeks.

European shares steadied as investors took the view that there would be no immediate military escalation after the U.S.-led strike on Syria at the weekend in response to a suspected poison gas attack in Douma on April 7.

Noting that, DZ Bank rate strategist Daniel Lenz said: “The second thing is that there has been less news about trade conflict between the U.S. and China, so this may also be a reason why yields are unchanged to higher.”

Financial markets have been roiled in recent weeks by threats of tit-for-tat trade tariffs between the administration of U.S. President Donald Trump and China. If implemented, these would be very likely to damage world growth, market players say.

As U.S. bond yields rose, the gap between two-year U.S. T-bonds and German Bunds pushed out to its widest since March 1989 at 296 bps.

Spain’s 10-year bond yield spread over Bunds was at its narrowest in a week at about 71.9 bps after Friday’s Moody’s upgrade.

Moody’s upgraded Spain’s ratings to Baa1 from Baa2 and said that improvements in the country’s credit profile outweighed a drag from political factors.

Elsewhere, Slovakia sold long-dated bonds, kicking off this week’s auctions in the bloc.

Reporting by Dhara Ranasinghe Editing by Louise Ireland and David Goodman

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