* German consumer morale highest in nearly 16 years
* Bund yields nudge back above 0.4 percent
* Germany set to auction 10-year bonds
By John Geddie
LONDON, May 24 Euro zone government bond yields
nudged higher on Wednesday as the improving consumer sentiment
in Germany was viewed as the latest evidence that a brightening
economy may encourage the central bank to wind back ultra-easy
Yields across the bloc have not yet strayed too far from
record lows breached in recent years as the ECB spent trillions
of euros on an asset purchase scheme and cut interest rates deep
into negative territory.
But with that scheme set to expire in December and investors
pricing in the chance of rate increases from early 2018, it is
becoming an uneasy truce between markets and policymakers.
"The more we see upside surprises on growth, the more the
ECB could justify removing some of the stimulus slightly
earlier," said Mizuho's head of euro rates strategy Peter
German 10-year yields climbed as much as 2 basis points to
0.43 percent on Wednesday.
Analysts said that a sale of 10-year bonds from Germany was
also adding upward pressure to yields as investors tend to trim
portfolios ahead of new supply.
Most other euro zone yields were flat or slightly higher on
Consumers in the bloc's powerhouse economy Germany were
their most optimistic in almost 16 years heading into June, a
survey showed on Wednesday, adding to expectations that private
consumption will again drive growth this year.
The consumer sentiment indicator published by the
Nuremberg-based GfK institute and based on a survey of about
2,000 Germans rose to 10.4 going into June, the highest reading
since October 2001. A Reuters poll had expected an unchanged
reading of 10.2.
That came on the back of an economic indicator on Tuesday
showing that euro zone business growth remains at its strongest
About three quarters of economists in a Reuters poll said
the ECB will signal it is winding down its monthly asset
purchases by September, with six of those expecting the central
bank to move as early as next month.
Money market pricing suggests that investors see more than a
50 percent chance of the ECB raising rates in March 2018.
ECB executive board member Benoit Coeure said on Tuesday
that negative interest rates have been an effective monetary
policy tool for the European Central Bank and there is no reason
to change its guidance on their use.
Another factor for policymakers will be the outlook for the
China, the world's second-largest economy, was dealt a blow
on Wednesday when Moody's downgraded its credit rating for the
first time in nearly 30 years. The firm said it expects the
financial strength of the economy will erode in coming years as
growth slows and debt continues to rise.
In the United States, investors awaited minutes of the U.S.
Federal Reserve's last policy meeting, though they are unlikely
to erode high expectations for a June rate increase.
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
(Editing by David Goodman)