Euro zone bond yields rise after BoE confirms gilt sales

By Harry Robertson

LONDON, Oct 19 (Reuters) - Euro zone bond yields rose on Wednesday after the Bank of England (BoE) said it would start reducing its gilt holdings from Nov. 1, as government debt markets continued to trade in lockstep.

The BoE said on Tuesday it would start selling some of its holdings of British government bonds from Nov. 1, but said it would not sell any longer-dated gilts this year.

Britain's central bank was forced to start buying bonds again last month after the government's plans for unfunded tax cuts - which have now been almost completely reversed - sparked chaos in the market for long-duration gilts.

Germany's 10-year government bond yield was last up 5 basis points (bps) at 2.32% on Wednesday. Yields rise as prices fall.

Britain's market turmoil has rippled around the globe in recent weeks, with traders buying and selling bonds on the back of monetary and fiscal announcements from the UK. Germany's 10-year yield hit an 11-year high of 2.423% last week as the BoE's emergency bond-buying scheme came to an end.

Britain's 10-year yield rose 7 bps to 4.012% in early London trading.

Although British turbulence has sparked volatility, the European Central Bank's interest-rate policy has been the key factor driving up bond yields this year.

Economists think the ECB will opt for another outsized 75 bps increase of its main interest rate when it meets on Oct. 27, according to a Reuters poll published on Wednesday.

Final data due out later on Wednesday was expected to confirm that euro zone inflation accelerated to a record annual rate of 10% in September.

Italian 10-year government bond yield rose 4 bps to 4.728% on Wednesday. The closely watched gap between Germany and Italy's 10-year yields was up 6 bps to 239.3, although it remained well below last month's two-year high of 266 bps.

Jon Day, portfolio manager at Newton Investment Management, said he thought euro zone bond yields have further to rise, with governments' energy support schemes giving the ECB a further incentive to raise interest rates.

"Of all markets I'd still be most wary of Europe," he said. "I'd rather be investing in a Treasury at 4%, Australia at 4%, a gilt at 4%."

Yet Dean Turner, an economist at UBS Wealth Management, said the ECB was also facing a gloomy economic outlook. He said the ECB would struggle to raise rates to around 3% from 0.75% currently, as markets expect.

Turner said the slowdown in Europe could make bonds look more attractive as safe havens. "It won't take much for that narrative to shift, not just on the ECB but on the allocation view," he said.

Investors are also on the lookout for signs of when the central bank might start reducing its own bond holdings.

France's Francois Villeroy de Galhau told the Financial Times the ECB could begin to shrink its balance sheet from the end of this year, in an interview published on Tuesday. (Reporting by Harry Robertson; Editing by Alex Richardson)