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Back on the defensive: euro zone bond yields creep up

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02/12/2018 | 05:58pm CEST

LONDON (Reuters) - Euro zone government bond yields edged higher on Monday on signs that policymakers, with their eyes on inflation, will continue on their monetary tightening path regardless of recent equity market volatility.

Bond yields across the bloc rose 1 to 2 basis points, while U.S. 10-year Treasury yields touched four-year highs at 2.90 percent <US10YT=RR> as investors flocked back to stock markets at the expense of safe-haven bonds.

Germany's 10-year bond yields, the euro zone's benchmark, traded around 0.76 percent, <DE10YT=RR> after earlier rising as high as 0.786 percent. That is near the 2 1/2-year highs hit last week at around 0.81 percent.

"This is just a continuation of the upward trend in bond yields as people reassess economic prospects," said Grant Lewis, head of research at Daiwa Capital Markets in London. "Even at 2.90 percent, 10-year Treasury yields are still low."

German bond yields closed Friday with their first weekly decline of the year as a selloff in world stock markets sent investors scurrying for safer assets. That put an end to the longest weekly run-up in long-dated German bond yields since 2007.

While stock markets have faced turbulence in the past two weeks, bond investors are braced for an end to the era of ultra-easy cash put in place after the global financial crisis to shore up economies and confidence.

Euro zone debt has been hurt in particular by several European Central Bank officials querying recently whether the ECB's asset-purchase scheme needs to continue beyond September.

ECB policymaker Ewald Nowotny's comments on the weekend were perceived as hawkish, too while unease is building about U.S. inflation numbers due on Wednesday.

In fact, the German bond yield curve on Monday was its steepest since mid-2014, as the gap between short and long-dated bond yields widened to 135 basis points <DE2DE10=RR>.

The U.S. yield curve is close to its steepest in months, reflecting investor expectations for higher inflation and interest rates.

"There's a concern about inflation getting out of hand, forcing central banks to change their response from trying to encourage growth to trying to dampen inflation," said Guy Stear, the co-head of fixed income research at Societe Generale.

Median forecasts are for U.S. consumer price inflation to slow a little to 1.9 percent from a year earlier, mainly because of the base effect of a high reading in January 2017. The core measure is expected to tick down to 1.7 percent.

(Reporting by Dhara Ranasinghe, additional reporting by Fanny Potkin, & Sujata Rao; Editing by Larry King)

By Dhara Ranasinghe

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