March 21, 2018 / 11:54 AM / a year ago

UPDATE 2-European bond yields rise as first Fed rate hike of 2018 looms

* Strong UK job growth data puts pressure on European yields

* US/German 2-year bond yield gap close widest in 21 years

* Markets waiting for U.S fed hike

* Euro zone periphery govt bond yields (Adds China tariffs story reaction, updates prices)

By Dhara Ranasinghe and Fanny Potkin

LONDON, March 21 (Reuters) - Euro zone government bond yields rose on Wednesday as strong British jobs data stoked expectations for a rate rise from the Bank of England ahead of an anticipated rate hike from the U.S Federal Reserve later in the session.

A view that the European Central Bank remains some way off raising rates given subdued inflation in the bloc kept the gap between short-dated U.S. and German government bond yields close to its widest in 21 years.

Two-year U.S. Treasury yields hit more than nine-year highs on Tuesday as investors bet the Fed will conclude a two-day meeting later this session by lifting interest rates for the first time this year.

Meanwhile, strong U.K. wage growth data put upward pressure on British bond yields, lifting borrowing costs in the euro zone by 1-4 basis points.

British workers’ overall pay rose at the fastest pace in more than two years during the three months to January, bolstering the chances that the Bank of England will raise borrowing costs in May.

There was downward pressure on yields later in the session after a Wall Street Journal report said China is planning countermeasures against U.S. tariffs, prompting a retreat to safe haven government bonds.

Euro zone borrowing costs remained close to multi-week lows on a view that the ECB will take a slow and steady approach to unwinding monetary stimulus.

In fact, a string of dovish comments from ECB officials over the past week have seen investors push back expectations for a ECB rate rise to the second quarter of next year from the first quarter, money market pricing suggests.

With U.S. two-year bond yields close to nine-year highs at around 2.35 percent and short-dated German bonds yields mired in negative territory at minus 0.58 percent , the gap between the two was at 292 basis points — close to its widest levels since 1997.

“The euro area economy, while doing well, is still several years behind the U.S.,” said Chris Scicluna, head of economic research at Daiwa Capital Markets. “If you look at how long it took the Fed to normalise policy, one can understand why the ECB will go slowly.”

The Fed is scheduled to issue its latest policy statement at 1800 GMT.

A key focus is if Jerome Powell adopts a more hawkish tone at his first meeting as Fed chairman than predecessor Janet Yellen and whether Fed officials change their projections for future rate increases, known as the “dot plot”.

“The Fed has set the market up for a more hawkish meeting,” said Chris Ellinger, a portfolio manager at Fidelity in London.

“In terms of the dots, to move from three hikes to four requires a few participants to push up their expectations, so we could see the dot plot remain at 3 hikes this year, which could be perceived as dovish by markets.”

Elsewhere, Germany sold 2.447 billion euros of 10-year bonds. Germany’s 10-year Bund yield touched 0.60 percent , up 2 basis points on the day, after the sale, before settling at 0.59 percent.

Reporting by Dhara Ranasinghe and Fanny Potkin Editing by Matthew Mpoke Bigg

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