* Yields steady after Monday's sharp falls
* Fed and BOJ optimistic on economy
* Italy proposes bank rescue plan
By John Geddie
LONDON, Dec 20 Optimistic signals from two of
the world's most influential central banks and a rescue plan for
Italy's ailing lenders halted sharp falls in euro zone
government bond yields on Tuesday.
Nerves around a faltering private sector recapitalisation
for Italian lender Monte dei Paschi and apparently politically
motivated killings in Germany and Turkey pushed yields on
Europe's safe haven benchmark Bund to two-week lows on Monday.
But comments by Federal Reserve chair Janet Yellen on the
strength of the U.S. jobs market, followed by a more upbeat view
of the economy from the Bank of Japan, appeared to kick the
rally into reverse on Tuesday.
The Italian government's plan to borrow 20 billion euros to
underwrite banks like Monte dei Paschi, and comments from the
Bank of Italy that national and European institutions are
committed to helping the sector, also soothed jittery markets.
German 10-year bond yields rose 1.5 basis points to 0.28
percent, steadying after a 10 basis point fall on
Monday, while most other euro zone equivalents were broadly 1-2
"The market is changing focus nowadays quite quickly," DZ
Bank strategist Daniel Lenz said. "Yesterday we had a lot of
focus on Italy and now it is more the economic assessment that
is driving things."
While Yellen didn't mention monetary policy in her speech to
university students on Monday, she said graduates were entering
the strongest jobs market in nearly a decade.
Some investors had been wary Yellen might pour cold water on
market expectations for a faster pace of rate hikes next year,
so her upbeat assessment of the economy brought relief.
Yellen's remarks were followed by a positive assessment of
Japan's economic prospects from the BOJ. While the central bank
kept monetary policy on hold on Tuesday, its comments reinforced
market expectations that its future policy direction could be an
increase - not a cut - in interest rates.
In the euro zone, a government bailout of Monte dei Paschi
could come as early as this week, if the bank fails to pull off
its own privately funded rescue plan.
While that appears to have calmed investor nerves for now,
it could be tough for the week-old administration of Prime
Minister Paolo Gentiloni, given that investors are required to
bear losses under EU bailout rules.
Italy's bonds settled after some early losses, and the yield
came down from a high of 1.89 percent in early trades to reach
1.85 percent by 1635 GMT, up 1.6 bps on the day.
For Reuters new Live Markets blog on European and UK stock
markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets
(Editing by Mark Trevelyan)