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UPDATE 2-Not enough Japan easing sends euro zone bond yields higher
July 29, 2016 / 7:26 AM / a year ago

UPDATE 2-Not enough Japan easing sends euro zone bond yields higher

(Updates prices, adds euro zone data)

By John Geddie

LONDON, July 29 (Reuters) - Euro zone yields rose along with other global bond benchmarks on Friday, after the Bank of Japan announced new monetary stimulus that fell short of market expectations.

The BOJ increased purchases of exchange-traded funds slightly but maintained its base money target at 80 trillion yen ($775 billion). Investors had expected interest rate cuts and a greater increase in asset purchases, including government bonds .

German 10-year bond yields - the euro zone bellwether - rose 2 basis points to minus 0.13 percent, while the Japanese equivalent was up 9 bps at minus 0.19 percent , its biggest daily rise in three years. U.S. 10-year Treasury yields rose 2 bps to 1.53 percent.

“The Bank of Japan has disappointed markets,” said RBC’s chief European macro strategist, Peter Schaffrik.

Despite the rise, euro zone yields remain close to record lows, amid hopes for widespread central bank easing.

The BOJ said on Friday it would assess in September the effects of negative interest rates and its massive asset-buying programme, suggesting that a major overhaul of its stimulus efforts may be forthcoming.

The Bank of England meets next week and is expected to cut rates and resume buying bonds to stave off any economic fallout from the country’s vote to leave the European Union last month. The European Central Bank is tipped to follow with more easing as early as September.

Data on Friday showed economic growth in the euro zone halved in the second quarter, pulled lower by weak consumer spending in France, the region’s second-largest economy .

Even the U.S. Federal Reserve, the only G7 central bank to raise rates in recent years, sounded cautious about the timing of more increases at its meeting this week.

“The BOJ may have disappointed, but other central banks remain poised to ease, so we expect macro investors will also be looking to buy the dip in European and US fixed income,” Mizuho International’s head of European rates strategy, Peter Chatwell, said.

Other economic headwinds in the euro zone are blowing in from Italy, which is expected to fare the worst in an annual stress test of the bloc’s banks due late on Friday.

Italy’s banking system is the weakest among the large EU countries, with its lenders saddled with around 360 billion euros ($400 billion) of bad debt.

It has four banks undergoing tests, with its third largest, Monte dei Paschi, under the most pressure. The tests are expected to show capital levels are insufficient to withstand a major economic shock at the bank, which is weighed down by around 50 billion euros in bad loans.

The extra yield investors demand to hold Italy’s debt over neighbour Spain rose to its highest since February 2015 this week at 14 bps, edging down only slightly to 11 bps on Friday.

Italian 10-year yields rose 1 basis point to 1.21 percent . Most other euro zone yields were 1 to 2 bps higher on the day. (Reporting by John Geddie; Editing by Nigel Stephenson and Larry King)

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