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UPDATE 2-Euro zone bond yields extend rise on hawkish central bank signals

·3-min read

(Updates prices, changes headline)

LONDON, Sept 24 (Reuters) - A rise in euro zone government bond yields continued on Friday, with Germany's benchmark yield hitting its highest since early July, carrying on Thursday's sell-off after a series of hawkish signals from major central banks.

The German 10-year yield had its biggest jump since February on Thursday, after Norway's central bank became the first major central bank to tighten policy following the COVID-19 crisis and the Bank of England said that the case for higher interest rates "appeared to have strengthened."

"A week of central bank action has shown us that policymakers are ready to move toward reining in on loose monetary policies introduced during the pandemic," wrote ING analysts in a note to clients.

An expectation of tighter central bank policy usually prompts investors to sell government bonds, meaning their prices go down and yields go up.

Rabobank rates strategists said the bond market move was led by U.S. Treasuries, and was due to a "risk-on" mood in global markets and a rise in oil prices, as well as the Bank of England's stance.

At 1519 GMT, Germany's benchmark 10-year government bond yield was up 3 basis points at -0.23%.

Italy's 10-year yield was up 6 bps at 0.785%, after hitting its highest since July 6 at 0.798%.

On Thursday, UK 2-year gilt yields had their biggest one-day jump since 2015. This surge continued in early trading on Friday, but had eased by midday, with the 2-year yield flat on the day at 0.39%, while the 10-year yield rose 3 bps to 0.935%.

The U.S. 10-year Treasury yield crossed the 1.4% level for the first time since mid-July on Thursday, then hit 1.452% during Asian trading hours. At 1519 GMT, it was up 4.5 bps on the day at 1.454%.

"The move in U.S. rates is coming from the belly of the curve; it's been becoming cheaper and that's a classic bearish construction," ING said. "It's what you would expect to see happen as a curve begins to position for a future rate hike, but not an imminent one."

The U.S. Federal Reserve had a hawkish tilt at its meeting on Wednesday, saying it would likely begin reducing its monthly bond-buying soon.

Sources also said that several European Central Bank policymakers expect higher inflation and see a case for ending its emergency bond-buying scheme in March.

But the ECB is still seen as more dovish than its peers. ECB President Christine Lagarde said that many of the drivers of a recent spike in euro zone inflation are temporary.

German business morale fell for the third month running in September, hit by a "bottleneck recession" for manufacturers, a survey showed.

Investors will also be watching the German federal election on Sunday. (Reporting by Elizabeth Howcroft; Editing by Mark Porter)

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