February 8, 2018 / 8:59 AM / a year ago

Euro zone yields near highs on spending prospects in Germany and the US

* Euro zone yields up 1-2 bps across the board

* Pro-spending SPD set for German finance ministry

* U.S. Senate agrees budget deal that adds to deficit

* Policymaker speeches eyed for effect on central banks

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

By Abhinav Ramnarayan

LONDON, Feb 8 (Reuters) - Euro zone government bond yields edged up further towards multi-year highs on Thursday as a budget deal in the United States and a coalition deal in Germany both pointed to higher spending either side of the Atlantic.

Germany’s pro-spending Social Democrats (SPD) are set to head the finance ministry in a coalition government, while U.S. Senate leaders reached a deal on Wednesday to raise spending on military and domestic programs by almost $300 billion over the next two years.

A string of policymakers are due to speak on Thursday, and with two of the world’s largest economies now expected to loosen the purse strings in the coming years, investors will be watching to see if rate setters expect to tighten monetary policy as a result.

“SPD getting the finance ministry (in Germany) means more social expenditure and perhaps also a less restrictive stance on Southern Europeans,” said DZ Bank strategist Daniel Lenz.

Yields across the euro zone rose 1-2 basis points in early trade and headed back towards multi-year highs, having briefly been pulled down by a “safe haven” bid during Tuesday’s stock market slump.

Germany’s 10-year government bond, the benchmark for the region, saw its yield rise a basis point to 0.745 percent; heading back towards the two-year high of 0.774 percent hit earlier in February. Most other euro zone bond yields were up 1-2 bps.

This after 10-year U.S. Treasury yields rose to a high of 2.86 percent overnight.

Italian, Spanish and Portuguese government bonds underperformed, their yields rising 2-3 basis points, but only after having fallen sharply the day before.

All three are still trading close to their tightest levels over Germany in months, and in some cases, years. Having a pro-European, pro-spending party at the heart of German government is seen as positive for these southern European countries.

A string of rate setters are expected to speak later on Thursday, including the ECB’s Francois Villeroy de Galhau and Peter Praet and the U.S. Federal Reserve’s Robert S Kaplan and Patrick Harker.

Earlier, Bundesbank President Jens Weidmann said on Thursday the euro’s strength and the recent stock market rout do not justify any substantial extension of the European Central Bank’s bond purchase scheme.

“The key questions are how good is the economy, will wages pick up and what does all of this mean for central bank policy,” said Lenz of DZ Bank.

In addition, the Bank of England is set to make a rates decision at 1200 GMT. Analysts expect the bank to keep rates on hold given the economic uncertainty that hangs over the UK, but it could telegraph a hike as early as May. (Editing by Matthew Mpoke Bigg)

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