October 6, 2016 / 12:31 PM / a year ago

UPDATE 2-Gilt sell-off, U.S. data nudge German yields briefly above zero


By Dhara Ranasinghe and John Geddie

LONDON, Oct 6 (Reuters) - Europe’s benchmark German bond yield edged briefly back above zero on Thursday, reversing earlier falls, as a sell-off in the British government bond market spilled over into the euro area.

Britain’s 10-year gilt yield jumped almost 10 basis points to a three-week high, with analysts citing concerns about a shift away from monetary policy to fiscal policy to support economic growth as a trigger for the move.

Data pointing to strength in the U.S. jobs market a day before the release of the non-farm payrolls report also weighed on global bond markets - U.S. Treasury yields also hit three-week highs.

But the sell-off was most significant in the gilt market, where investors sense a shift in focus for policymakers.

Finance minister Philip Hammond will set out next month how Britain will try to rely less on ultra-low interest rates that have hurt savers, and focus more on other ways to boost growth, an adviser to Prime Minister Theresa May said.

May took the unusual step of commenting on central bank policy on Wednesday when she said near-zero rates and the Bank of England’s huge bond-buying programme had hurt savers.

“The BoE is meant to be independent. As soon as politicians threaten that independence the cost of borrowing will rise and the exchange rate will fall,” David Blanchflower, professor of economics at Dartmouth College in New Hampshire and a former Bank of England policymaker, told Reuters.

Germany’s 10-year bond yield rose as high as 0.008 percent before retreating to just below zero.

“There is a growing feeling about a shift away from monetary policy to fiscal policy in the UK,” said Orlando Green, European fixed income strategist at Credit Agricole.

European Central Bank chief economist Peter Praet, meanwhile, said the ECB needed to watch the side effects of its ultra-easy monetary policy.

Euro zone yields, including the bloc’s top-rated German debt - usually seen as a safe haven in times of stress - have shot higher this week after reports that the ECB might scale back its quantitative easing scheme.

Despite a spokesman for the ECB saying the central bank had not discussed such ‘tapering’, the mere mention of the word has rattled markets already questioning whether central banks can win the battle to boost growth and inflation.

Minutes from the ECB’s last meeting helped soothe the concerns, allowing euro zone bonds a brief respite from selling.

ECB rate-setters agreed the euro zone economy needed continued monetary support when they met in September, noting underlying price growth showed no sign of recovery, the minutes showed.

“The market did need some confirmation that the next step will be more easing and we can see hints of that in these minutes,” said Cyril Regnat, fixed income strategist at Natixis.

French and Spanish bond auctions eased upward pressure on yields. France sold about 7.5 billion euros of long-term debt, including a 50-year bond, while Spain sold 4.8 billion euros.

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 Dhara Ranasinghe; Additional reporting by Jamie McGeever; Editing by Hugh Lawson)

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