October 14, 2016 / 11:22 AM / in 9 months

UPDATE 2-Euro zone bond yields edge higher ahead of Yellen speech

4 Min Read

(Updates prices, adds move in Portuguese bonds)

By Abhinav Ramnarayan

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 hope 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 1.78 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 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, data showed U.S. retail sales rose 0.6 percent in September, meeting the expectations of economists polled by Reuters.

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.

British government bond yields rose more than 10 basis points, hitting their highest level since the country voted to leave the European Union, as a weakening pound stoked inflation expectations.

Ten-year gilt yields rose as high as 1.149 percent , the highest since June 23, according to Reuters data.

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

As most euro zone bond yields crept up, Portuguese yields bucked the trend and fell about 8 bps to a two-week low at 3.306 percent ahead of the country's budget.

Portugal's government aims to increase public sector wages and pensions and lower income tax next year while reducing the fiscal deficit, the prime minister said on Friday before presenting the 2017 budget. (Additional reporting by Dhara Ranasinghe; Editing by Tom Heneghan)

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