February 16, 2018 / 8:26 AM / a year ago

Euro zone bond yields steady but inflation jitters linger

* Euro zone bond yields higher, set to end week up

* US 2-year yields set for biggest weekly rise in almost a year

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

By Dhara Ranasinghe

LONDON, Feb 16 (Reuters) - Borrowing costs across the euro area were mostly steady on Friday, although expectations for higher inflation and a step towards tighter monetary policies from major central banks continued to weigh on sentiment across world bond markets.

In the United States, where data on Wednesday showed consumer prices rose more than expected in January, interest-rate sensitive two-year Treasury yields were set to end the week up 15 basis points - the biggest weekly rise in almost a year.

As investors bet the U.S. Federal Reserve could deliver more rate hikes than anticipated this year, bond yields have risen even as equity markets this week appeared to shake off the strong inflation numbers.

“It has been a U.S. story this week, with the CPI data prompting markets to price in more rate hikes from the Fed, which makes sense to us,” said Mizuho rates strategist Antoine Bouvet.

“The other interesting development is the weakness in the dollar, which makes investment in the U.S. less attractive as the cost of hedging is higher,” he said.

The dollar slipped to a three-year low against a basket of currencies on Friday, headed for its biggest weekly loss in two years.

Expectations for a May rate rise from the Bank of England have also shot up in the past week, while strong economic growth data adds pressure on the European Central Bank to signal a step away from its ultra-loose monetary policy stance.

In early Friday trade, 10-year bond yields across the euro zone were flat to just a touch lower on the day.

Germany’s benchmark Bund yield was steady at 0.76 percent and within sight of recent 2-1/2 year highs.

Two-year German bond yields were steady at minus 0.49 percent, having hit their highest since May 2016 on Thursday at around minus 0.47 percent.

They have risen around 7 bps this week and were on track for their biggest weekly rise in eight weeks.

Elsewhere, there was some focus on Greece with Fitch Ratings due to release its latest review on the indebted southern European state late on Friday.

Fitch rates Greece B- with a positive outlook. In January S&P lifted Greek long-term ratings for the first time in two years.

Reporting by Dhara Ranasinghe; Editing by Robin Pomeroy

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