June 7, 2018 / 8:27 AM / 12 days ago

REFILE-ECB, new debt supply boost top-rated euro zone yields

* France, Spain due to sell new bonds at auction

* ECB tightening expectations are main market driver

* Italy concerns ebb after PM wins confidence vote

* Euro zone peripheral bond yields tmsnrt.rs/2ii2Bqr

By Abhinav Ramnarayan

LONDON, June 7 (Reuters) - Top-rated euro zone government bond yields hit their highest in weeks on Thursday before new supply from France and Spain and following hints from rate-setters that the ECB could announce the end of bond buying next week.

Political ructions in Italy had sent investors scurrying back to the safety of core debt, notably German and French paper.

Most euro zone bond yields had already risen sharply on Wednesday after ECB chief economist Peter Praet said the central bank would next week debate whether to gradually unwind bond purchases.

On Thursday, the yield on Germany’s 10-year government bond yield, the benchmark for the euro zone, was at 0.506 percent, going past 0.50 percent for the first time in two weeks. France’s borrowing costs were up 3.5 bps at 0.84 percent, a three-week high.

“The wave of supply that will hit later this morning, especially in the 10-year area, is putting pressure on yields,” said ING strategist Martin van Vliet.

“But this is also about the market positioning for a change in the ECB stance and a possible announcement next week (of ending bond purchases).”

France is set to raise 8-9 billion euros of bonds through an auction including a new 10-year issue, and Spain is set to sell up to 5.25 billion euros of debt.

Bond yields usually rise ahead of large auctions as investors make space for the new supply.

Thursday’s core yields were well above troughs hit last week when German 10-year yields dropped as low as 0.19 percent and French 10-year yields dipped to 0.70 percent due to political uncertainty in Italy.

The threat of a new election — seen by some as a proxy referendum on Italy’s membership of the euro zone — has been averted, at least for now.

That has calmed markets to some degree, though trade in Italian government bonds remained volatile. Ten-year yields were down 6 basis points to 2.87 percent, having risen sharply the day before on prospects of ECB tightening.

Italy is seen as one of the biggest beneficiaries of the central bank’s bond-buying scheme, and the closely watched Italy/German 10-year bond yield spread was at 236 bps - off Wednesday’s peak of 250 bps but still more than double what it was in mid-April.

New Prime Minister Giuseppe Conte comfortably won a confidence vote in the lower house of parliament on Wednesday, confirming his government’s majority after promising tough negotiations with Europe over the economy.

Final euro zone GDP growth data for the first quarter is due out at 0900 GMT, with a Reuters poll showing expectations for a reading of 2.5 percent. (Reporting by Abhinav Ramnarayan; editing by John Stonestreet)

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