April 24, 2018 / 2:36 PM / in a year

UPDATE 2-Euro zone bond yields rise after US 10-year yield hits 3 pct

(Updates throughout)

By Fanny Potkin and Dhara Ranasinghe

LONDON, April 24 (Reuters) - Germany’s 10-year bond yield, the benchmark for the euro zone, rose to a 6-week high on Tuesday after U.S. 10-year borrowing costs hit 3 percent for the first time in four years.

Euro zone bond yields rose after U.S. bonds came under renewed selling pressure on worries about rising inflation and growing government debt supply, before slightly pulling back at the end of the session.

Analysts said touching the psychologically important 3 percent level had been expected by markets, and linked it to increased inflation concerns due to an oil price surge.

“The more interesting move is, if we’ve hit 3 percent, does that open the flood gates?” Rabobank rates strategist Lyn Graham-Taylor said.

“Structurally, we still favour lower bond yields but the U.S. tends to drive everything.”

As U.S. 10-year Treasury yields hit 3.003 percent for the first time since January 2014, Germany’s 10-year Bund yield rose to as high as 0.655 percent.

Both eased from those highs, with the yield on the 10-year Treasury dropping to 2.98 percent by the end of European trading.

Ten-year bond yields across the euro zone were flat to 0.5 basis points higher at the close of markets, having been steady for much of the session.

The U.S.-led bond sell-off came on a day when oil prices topped $75 a barrel to touch their highest since November 2014, supported by OPEC-led production cuts, strong demand and the prospect of renewed U.S. sanctions on Iran.

“We’ve said this (3 percent) level would go, and given that everybody is talking about inflation with views to developments in the commodities space - that’s where this move is coming from,” said Benjamin Schroeder, senior rates strategist at ING.

The two-year Treasury yield, in the meantime, rose to as much as 2.50 percent for the first time since September 2008 amid bets the Federal Reserve would raise short-term rates further due to an improving U.S. economy.

Meanwhile, the premium that investors demand to hold 10-year Italian debt over top-rated German bonds tightened to its lowest in two years at 113.3 basis points, after Italy’s centre-left Democratic Party (PD) said it could hold coalition talks with the 5-Star Movement on condition the anti-establishment party breaks contact with the centre-right.

After seven weeks of political stalemate following inconclusive national elections, the head of the lower house of parliament is meeting leaders of both the PD and 5-Star to see if the two groups would be ready to work together.

“It gives another option of an old-guard back in government and if it did happen tomorrow, Italian bonds would outperform,” said Rabobank’s Graham Taylor. (Reporting by Fanny Potkin and Dhara Ranasinghe; Additional reporting by Helen Reid; Editing by Alison Williams)

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