December 19, 2017 / 8:26 AM / a year ago

European bond yields rise on U.S tax optimism

* U.S. likely to pass tax overhaul this week

* Most euro zone bond yields up 1-2 bps

* Portuguese bonds steady after stand out performance

* Euro zone periphery govt bond yields

By Fanny Potkin

LONDON, Dec 19 (Reuters) - Euro zone government bond yields edged up on Tuesday as investors bet that U.S. lawmakers would finally pass tax legislation this week that could boost growth and inflation.

The Republican-controlled Congress appeared all but certain to pass a tax cut bill after two Senate Republican holdouts agreed on Monday to support the overhaul backed by President Donald Trump.

The House of Representatives, which is also expected to adopt the bill, was due to vote first at around 1830 GMT on Tuesday, Republican aides said on Monday. The Senate vote is expected to follow either later on Tuesday or on Wednesday.

“Democrats continue to highlight how the plan is set to increase wealth inequality over the medium term, but the plan is set to pass given the amount of Republican support,” strategists at Mizuho said in a note.

Most European bond yield were up 1-2 basis points in early trade.

Germany’s benchmark 10-year bond yield was 1 bps higher at around 0.32 percent, above three-month lows hit last week at 0.29 percent.

The German yield curve, which on Monday was at its flattest in almost six months, was a little steeper as a result.

In the U.S., yield curve flattening trades also appeared to take a breather.

The margin between U.S. shorter-dated and longer-dated Treasury yields widened on Monday from its slimmest in a decade as traders booked profits on curve-flattening positions.

A view that interest rates will rise over the short term but inflation will remain subdued over the long term has driven flattening trades in world bond markets recently.

Portuguese borrowing costs were flat, after a stand-out performance on Monday, when yields hit their lowest since early 2015 in response to a surprise two-notch sovereign upgrade from Fitch Ratings.

Portugal’s 10-year bond yield was at 1.79 percent in early trades, having hit 1.73 percent on Monday.

Commerzbank said in a note that “the resumption of Portuguese supply including a probable long-end benchmark launch will put these levels to the test in January.”

Analysts said Thursday’s snap election in Catalonia could also dent demand for peripheral bonds, with pollsters predicting a hung parliament in the wealthy but politically divided Spanish region between its pro-independence and pro-union camps.

Germany is expected to announce its 2018 issuance later on Tuesday and will also be releasing its much-watched Ifo business survey for December.

Reporting by Fanny Potkin; editing by John Stonestreet

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