October 14, 2016 / 8:26 AM / a year ago

Euro zone bond yields edge higher ahead of Yellen speech

LONDON, Oct 14 (Reuters) - Euro zone government bond yields edged higher on Friday ahead of a speech by Federal Reserve chair Janet Yellen from which investors are hoping to glean further clues as to the likelihood of a U.S. rate hike in December.

The yield on the U.S. 10-year Treasuries rose to 1.77 percent, edging towards the four-month high of 1.80 percent hit earlier in the week and putting upward pressure on Germany’s 10-year Bund yield.

That benchmark rose 1.2 basis points to 0.05 percent, a level that DZ Bank strategist Christian Lenk described as an “inflexion point”.

“I think markets are trying to find a new equilibrium, and the 5 basis point yield (for German 10-year Bunds) is the point at which the sell-off seems to consolidate,” he said.

Minutes published this week from the most recent meeting of Fed policymakers showed many judged a rate hike would be warranted “relatively soon” if the U.S. economy continued to strengthen, but doubts on inflation remained.

“There is a bit of nervousness ahead of Yellen’s speech, and with the European Central Bank meeting next week,” Lenk said.

“An increasing number of Fed members are pushing for a December hike, but there always remains the uncertainty of ‘data dependency’, so Yellen’s speech today will be watched to see which way she is leaning.”

Expectations for a December hike are currently at 60 percent, according to CME’s Fedwatch tool.

Ahead of Yellen’s speech, which begins at 1830 GMT, the U.S. Census Bureau is due to release the retail sales report, which could inform the expectations for a December hike.

Euro zone yields fell on Thursday on a flight-to-safety bid following weak trade data from China.

They have risen sharply in recent weeks on concerns that the ECB might reduce the scale of its asset purchases before the programme finally ends.

The 10-year Bund yield has risen as much as 21 basis points since the end of September, when it hit a low of minus 0.16 percent, according to Tradeweb.

The ECB is due to meet next Thursday, and Commerzbank analysts said the central bank has a challenge on its hands.

“The ECB will be facing a huge communication challenge when deciding to either run down its asset purchases or to change key parameters,” the analysts said in a note.

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 (Reporting by Abhinav Ramnarayan; editing by John Stonestreet)

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