November 5, 2018 / 8:47 AM / 13 days ago

Core euro zone bond yields slip ahead of U.S. midterms, Eurogroup meeting

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

By Virginia Furness

LONDON, Nov 5 (Reuters) - Core euro zone bond yields were lower on Monday as expectations of faster rate hikes in the United States, as well as doubts over Sino-U.S. trade talks and the impending mid-term elections prompted more defensive positioning in the markets.

Upbeat jobs figures on Friday reinforced bets on rising inflation and more interest rate hikes by the Federal Reserve, pushing the yield on the 10-year US Treasury bond to three-week highs.

But risk appetite had tempered by Monday with Asian stocks sinking on uncertainty around the Sino-U.S. trade war, leading to a steady open in European markets. Weaker sentiment pushed down most core euro zone government bond yields by up to two basis points..

UniCredit analysts expect that Germany’s 10-year government bond yield, the benchmark for the region, will take its lead from U.S. Treasuries and hold steady above 0.4 percent. It was last 1.4 basis points lower at 0.42 percent.

The biggest drivers of markets this week however are yet to come, with analysts identifying Tuesday’s U.S. congressional mid-term elections, as well as any potential acknowledgement of stronger U.S. growth at the Federal Open Markets Committee meeting later this week, as key events.

ITALY UNDER PRESSURE

Italian government bond yields rose ahead of a Eurogroup meeting, and after the European Banking Authority identified Italy’s Banco BPM as one of the banks that fared the worst in its Europe-wide stress test.

The Eurogroup of euro zone finance ministers will meet to discuss deeper euro zone integration and are expected to address the opinion issued by the commission concerning Italy’s draft budgetary plan, though some analysts are not expecting any market moving developments.

“Italy is going to fall into the background,” said Jan von Gerich, fixed income analyst at Nordea. “The Commission won’t do anything else but talk tough and even if they have the balls to bring in sanctions it would be late spring anyway.”

Two-year Italian government bond yields were 10 basis points higher to 1.18 percent, while its longer-dated bond yields were up to four basis points higher.

On Friday the European Banking Authority (EBA) completed its health check of the region’s systematically important banks, concluding that none of the 48 lenders failed a major capital threshold.

The latest test measured banks’ ability to withstand theoretical market shocks like a rise in political uncertainty against a backdrop of plunging economic growth, a disorderly Brexit or a sell-off in government bonds and property.

Italian banks had been expected to be among the worst performers given the sharp rise in Italian government bond yields this year.

Reporting by Virginia Furness Editing by Raissa Kasolowsky

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