* European markets lower, gilts, sterling in firing line
* Treasury, Bund yields at highest since June
* Wall Street seen down 0.2 percent, earnings rise for BoAML
* Yellen suggests allowing inflation to overshoot target
* Oil inches higher
By Marc Jones
LONDON, Oct 17 U.S. and European government bond
yields, the main driver of global borrowing costs, hit their
highest since June on Monday as questions mounted about how the
world's big central banks could react to a sudden bout of
The U.S. dollar hovered near a seven-month high
while European and Asian stocks started
the week firmly in the red, with Wall Street set to dip when it
resumes amid a flurry of company earnings.
But most action was in bonds, with 10-year U.S. Treasury
yields pushing past 1.8 percent and German Bund
yields at their highest in four months ahead of a
European Central Bank meeting on Thursday. Brexit worries
meanwhile ensured another torrid session for UK gilts.
All the moves came amid signs that inflation is finally
starting to wake from its slumber and that top central banks may
let inflation "run hot" as U.S. Federal Reserve Chair Janet
Yellen suggested on Friday.
"We have the two-month window where there will be a lot of
uncertainty about what the European Central Bank will do, and we
had a poor gilt opening this morning and that has spooked the
market," said Mizuho interest rate strategist Antoine Bouvet.
"We expected another 20 basis point rise in Bund yields by
Elsewhere in markets, the dollar took a breather
after hitting a seven-month high against a basket of six major
currencies and following its largest weekly rise in more than
seven months last week.
That gave some respite to the euro and yen, which had
both touched 2-1/2-month lows of $1.0964 and 104.22 yen per
dollar respectively, although not for the Brexit-battered pound
which slumped back to $1.2140.
Media reports of disagreements between the finance minister
and his cabinet colleagues over the terms of Britain's exit from
the European Union were the latest cause of strife.
The Daily Telegraph newspaper said Philip Hammond could quit
his post after being excluded from government meetings because
he had criticised the "hard Brexit" stance of Prime Minister
Although the Treasury denied that Hammond would step down
and May's spokeswoman said "differing views" on the Brexit route
would be heard, the reports did little to instil confidence in
the pound, traders said.
Wall Street was digesting earnings from Bank of America
, the second-largest U.S. bank by assets, which reported
on its first increase in profit in three quarters, while also
awaiting U.S. industrial output data.
Other data due this week includes U.S. and UK consumer
prices and UK producer prices on Tuesday, and Chinese
third-quarter gross domestic product on Wednesday.
The European Central Bank will publish bank lending figures
on Tuesday and hold a policy meeting on Thursday, while euro
zone consumer confidence data for October is due on Friday.
Emerging Asian currencies lost ground on Monday after the
comments by Yellen, which spurred investors to cut bond holdings
in the region.
The Chinese yuan also weighed, having dropped to
its weakest since September 2010 as the central bank in Beijing
set its official guidance rate lower again.
China's economy probably grew 6.7 percent in the third
quarter from a year earlier, the same pace as the previous
quarter, as increased government spending and a property boom
offset stubbornly weak exports, according to a Reuters poll.
But analysts are increasingly worried that China's growth is
becoming too reliant on government spending, ballooning debt
levels and a housing market that is showing signs of
MSCI's broadest index of Asia-Pacific shares outside Japan
had ended down 0.5 percent, with Hong Kong's
Hang Seng hitting 1-1/2-month lows, though the weaker yen
helped Japan's Nikkei close up 0.3 percent
Safe-haven gold also edged up as buyers began to
resurface after a 6 percent fall over the last few weeks.
"Markets are reacting to the possibility that the Fed might
join the Bank of Japan in conducting policy to steepen the yield
curve," Ric Spooner, chief market analyst at CMC Markets in
Sydney, wrote in a note.
"In the Fed's case, this might amount to running the
gauntlet of higher inflation with a very slow pace of monetary
Oil prices, which have risen for four straight weeks, have
helped drive the pickup in inflation globally.
Brent crude futures stood a fraction higher at
$52.13 in European trade, with U.S. crude futures at
$50.45 per barrel. They were capped by a rising rig count in the
United States, a strong dollar and record OPEC output.
Some market players are wary of a possible hit to risk
appetite after Iraq's Prime Minister Haider al-Abadi announced
the start of an offensive to retake the Iraqi city of Mosul from
(Editing by Catherine Evans)