April 24, 2018 / 7:38 AM / 8 months ago

Euro zone yields drop but U.S. Treasury landmark hangs over market

* Bonds in demand ahead of Ifo survey, debt redemptions

* But U.S. 10-year yields hover near landmark 3 pct level

* Italy/Germany spreads still tight ahead of ECB meeting

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

By Abhinav Ramnarayan

LONDON, April 24 (Reuters) - Investors resumed their buying of euro zone government bonds on Tuesday, pushing yields lower, as a glut of redemptions and a weaker economic climate re-asserted themselves as key drivers of the market.

A survey by Germany’s Ifo Institute on Tuesday morning is expected to confirm a decline in the positive business sentiment in the bloc, while 41 billion euros of redemptions from French government bonds alone should boost demand for debt.

However, analysts warned that all bets are off if 10-year U.S. Treasury yields hit 3 percent, having come within a sliver of touching that psychologically-important landmark on Monday.

“Apart from the supply-demand imbalance, the Ifo survey underscores what we’ve identified before as a decline in economic sentiment in the euro zone that should support the market indeed,” said Commerzbank strategist Christoph Rieger.

Euro zone borrowing costs dropped across the board, with the yield on 10-year German Bunds - the benchmark for the bloc - slipping 1.5 basis points to 0.62 percent.

Most other euro zone bond yields were 1-2 basis points lower.

This could change depending on what happens to debt from across the Atlantic. Ten-year U.S. Treasury yields were at 2.966 percent and with oil prices climbing above $75 a barrel for the first time since late 2014, a further rise cannot be ruled out.

“Whether this will mark the beginning of a new range or the start of a bear market is the question; or whether it’s a welcome buying opportunity,” said Rieger of Commerzbank.

Any rise in U.S. Treasury yields are likely to act is a “magnet” and pull euro zone yields higher, he said.

Meanwhile, the market is also gearing up for Thursday’s European Central Bank meeting, with investors hoping to get some inkling of how concerned policymakers are about the dulling of economic sentiment in the bloc.

Any increase in concern should push rate hike prospects out further and the potential for asset purchases to continue until the end of the year.

Later on Tuesday, ECB member Francois Villeroy de Galhau is due to speak with topics including the outlook for the ECB’s asset purchase programme.

In recent weeks, peripheral government bonds - seen as beneficiaries of the ECB’s bond-buying scheme - have performed strongly compared to better-rated peers.

Italy’s 10-year government bond yield spread over Germany is close to its tightest level since August 2016 at 116 basis points, despite the political uncertainty in that country following the March general election.

Italy’s president on Monday asked the head of the lower house of parliament to see whether the 5-Star Movement and centre-left Democratic Party (PD) could form a coalition government but initial reaction suggested that would be an unlikely match. (Reporting by Abhinav Ramnarayan Editing by Andrew Heavens)

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