January 16, 2018 / 9:11 AM / a year ago

Euro zone bonds stem losses as market reassesses pace of tightening

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

By Abhinav Ramnarayan

LONDON, Jan 16 (Reuters) - Euro zone government bond yields came off recent highs and low-rated Italian and Portuguese debt outperformed as investors re-assessed their view on how quickly the European Central Bank will tighten policy.

Potential hurdles to a German coalition government hit the euro in early trade and may also be boosting demand for safe haven government bond yields.

“I think the interpretation of the minutes has been a bit too hawkish in a way and the Weidmann speech was a bit of a push back,” said ING strategist Benjamin Schroeder, referring to Bundesbank President Jens Weidmann’s comments last week that the risk of an imminent hike in rates is low.

Euro zone government bond yields fell 2-3 basis points across the board. The yield on 10-year German government bonds was down 2.5 bps to 0.50 percent.

Most high-grade government debt in the bloc has sold off sharply in recent weeks on growing signs that the ECB will withdraw its extraordinary stimulus sooner rather than later.

This accelerated when ECB minutes last week showed that policymakers may start tweaking the policy message in early 2018, but analysts said the sell off may have gone too far.

“Also we had quite a bit of supply the week before and this week is a bit quieter both in terms of supply and data releases,” said Schroeder of ING.

Though four euro zone countries are set to sell bonds through auctions this week, only one syndicated bond sale — a Belgian 10-year bond — has been announced so far. Last week, Italy and Portugal conducted sizeable bond sales.

Lower-rated Italian and Portuguese debt outperformed, 10-year yields dropping about 4 bps each. The gap between Italian and German 10-year borrowing costs narrowed to its tightest level since mid-December at 145 bps.

Reports of potential hurdles to German coalition talks between Germany’s conservatives and Social Democrats (SPD) briefly hit the euro on Tuesday morning, and may have put some downward pressure on bond yields as well.

Political heavyweights from Germany’s conservatives and Social Democrats (SPD) sought on Monday to shore up support for talks on joining forces in a coalition, after members of the centre-left party in one region voted against a deal. (Reporting by Abhinav Ramnarayan; Editing by Catherine Evans)

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