May 12, 2017 / 8:07 AM / 2 months ago

Bunds steady, eyes on sales next week

4 Min Read

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

By Patrick Graham

LONDON, May 12 (Reuters) - European government bond yields steadied on Friday after solid German growth numbers and comments from European Central Bank officials did little to fuel expectations for a reining in of the bank’s ultra-loose monetary policy soon.

A weaker opening on stock markets offered some support to prices, while Greek government bond yields – still minimally traded after years of debt crisis and EU bailouts - were volatile and mixed as investors weigh the chances of a test return to bond issuance this summer.

By 0812 GMT, the benchmark 10-year German government yield inched down just over 1 basis point on the day to 0.414 percent.

Yields on the euro zone's weaker borrowers like Italy, Portugal and Spain, were all also 1-3 basis points lower as investors awaited announcements of volumes for expected bond sales next week by France and Spain.

"Things do look calmer with equity markets having stabilised," said Peter Chatwell, head of euro rates strategy at Mizuho in London.

"This is probably just a day for consolidation with some focus on supply for next week. ... The market is still contemplating that there will be a fair amount (of issuance) and also how much we will see in syndicated issues."

ECB vice-president Vitor Constancio echoed the caution of the bank's head Mario Draghi and chief economist Peter Praet on Thursday in the face of growing calls from Germany to wind down the bank's 2.3 trillion euros bond-buying programme.

Expectations of a change at least in language from the bank in June have grown, underpinned a steady rise in Bund yields in the past month, but for shorter-dated notes they remain deep in negative territory and below this year's highs.

Friday's data showed Germany's economy grew 0.6 percent in the first quarter, bang in line with expectations.

"The bias is clear, that the next move will be towards tightening and what they (ECB officials) are trying to do is mitigate the market factoring in that too much," Chatwell said.

"That is why there is so much communication going on and why Praet is being so detailed and erring on the dovish side to prevent the market from acting too severely."

Greek government borrowing costs hit their lowest level in more than five years on Wednesday as Athens looked set to clinch vital bailout loans from its international lenders.

But there is scepticism on whether it will eventually be added back into the ECB's bond-buying programme as officials mull a return to markets later this year.

"Latest headlines from Greece (see overnight news) underpin the impressive rally in (Greek bond prices) but we believe that high hopes for being included in QE will get disappointed," Commerzbank analysts said in a morning note.

The yield on Greece's 10-year bond -- an often volatile indication of the cost for the government to raise long-term cash in financial markets -- were roughly unchanged on Friday, while 2-year yields rose by 22 basis points and 5-year yields fell 10 basis points, according to Reuters data.

For Reuters 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

Writing by Patrick Graham; Editing by Hugh Lawson

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