February 1, 2018 / 9:04 AM / 3 months ago

CORRECTED-UPDATE 1-Euro zone yields rise as U.S. policymakers talk up inflation

(Corrects time of Praet speech in paragraph 13 to 1000 GMT from 1100 GMT)

* Euro zone yields up 2-3 bps on day

* Germany’s yield hits fresh two-year high

* French, Spanish auctions loom

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

By Fanny Potkin

LONDON, Feb 1 (Reuters) - Euro zone government bond yields rose across the board on Thursday after policymakers in the United States flagged a potential uptick in inflation in the world’s biggest economy.

The U.S. Federal Reserve kept interest rates unchanged at its policy meeting on Wednesday but said inflation was likely to rise this year, bolstering expectations borrowing costs will continue to climb under incoming central bank chief Jerome Powell.

This pushed U.S. Treasury yields higher, and their euro zone counterparts followed suit on Thursday, having already been at multi-year highs on expectations of tighter policy in Europe.

“Long-ended U.S. yields are still rising and that’s spilling over on the European market and Bunds especially. 10-year Bunds are now taking more steer from U.S. developments than the domestic economy,” said Commerzbank rates strategist Rainer Guntermann.

Germany’s 10-year government bond yield, the benchmark for the euro zone, hit a fresh two-year high of 0.71 percent, in early trades, up 2 basis points on the day.

Meanwhile, Reuters data showed French 10-year borrowing costs hitting 1 percent for the first time since March 2017.

This after 10-year U.S Treasury yields reached 2.75 percent, their highest level since April 2014, in overnight trade.

“There is now the expectation of 3 to 4 rate hikes this year (in the U.S.) on the back of a bullish and strong economy in the U.S. and Europe,” said DZ Bank strategist Daniel Lenz.

“And of course with the ECB likely coming up with a new forward guidance in the next meeting, the market is anticipating this as well.”

Borrowing costs across the bloc rose by 2-3 basis points, and market sentiment is likely to tested further by French and Spanish bond auctions later on Thursday.

The French Treasury plans to sell 8 to 9 billion euros of long-dated bonds, while Spain will auction 3 to 5 billion euros of medium to long-dated bonds.

Later on Tuesday, the European Union will release its manufacturing survey for January, which analysts say could provide a respite in the recent sell off in European bond markets, if the data is positive.

ECB chief economist Peter Praet also is due to speak at 1000 GMT, and investors will be keeping an eye out for any clues on the pace at which the central bank will withdraw extraordinary stimulus.

The ECB will not be too hasty in ending its 2.55 trillion euro bond purchase programme as inflation is still not moving decisively towards its target, executive board member Benoit Coeure said on Wednesday. (Reporting by Fanny Potkin; Editing by Peter Graff)

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