July 30, 2018 / 10:33 AM / 4 months ago

UPDATE 3-Euro zone bond yields rise after Italian auction, BOJ moves into focus

* Italy sells 7.5 billion euros of bonds

* Yields rise 4-5 bps across euro zone

* German 10-year yield hits six-week high

* BOJ meeting in focus, German inflation data out

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices for close, adds move in USTs)

By Abhinav Ramnarayan

LONDON, July 30 (Reuters) - Euro zone government bond yields rose across the board on Monday after a strong Italian auction boosted demand for Italian debt at the expense of higher-rated markets in the bloc.

Expectations for an upcoming Bank of Japan meeting as well as German and Spanish inflation data also put upward pressure on yields, analysts said.

Italy’s scheduled bond auctions, which included the sale of a new 10-year benchmark, was seen as a test of investor risk appetite amid political tensions in the euro zone’s third largest economy.

The country’s debt agency sold the top planned amount of 7.5 billion euros ($8.8 billion) as support provided by the European Central Bank’s pledge of a very gradual policy tightening countered investor concerns over the next budget law.

In a market with thin volumes, this pushed yields higher, as investors shed high-grade bonds to buy debt in the new auction.

“It was a strong result in the Italian auctions so we are seeing some carry trades being put back on,” said Mizuho strategist Antoine Bouvet.

Carry trade is industry parlance for using low borrowing costs to buy higher yielding assets such as Italian government debt.

As a result, euro zone bond yields climbed 4-5 bps. Germany’s 10-year government bond yield, the benchmark for the region, rose more than 4 bps to a six-week high of 0.46 percent.

Italian 10-year bond yields briefly outperformed their peers after the auction results before trading about 5 bps higher in late trade as a selloff in U.S. Treasuries exacerbated upward pressure on euro zone debt yields.

Expectations that the Bank of Japan may announce a tweak in its monetary stimulus when it meets on Tuesday weighed on global bond markets, with the U.S. 10-year Treasury yield rising to a six-week high just shy of 3 percent.

“The risk of the BOJ changing its yield target on 10-year bonds is very low, I don’t think it’s likely but there are very bearish implications for the rates market if they do,” said Bouvet of Mizuho. “So do you really want to hold that 10-year Germany in the face of that risk?”

Preliminary data on Monday meanwhile showed German and Spanish inflation remained slightly above the European Central Bank’s price stability target in July, supporting the ECB’s cautious approach of winding down its monetary stimulus only gradually.

The ECB targets inflation of just below 2 percent in the bloc. (Reporting by Abhinav Ramnarayan Editing by Jamie McGeever, Janet Lawrence, Richard Balmforth)

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