January 11, 2018 / 11:43 AM / a year ago

UPDATE 1-Euro zone bond yields fall as calm returns to rattled markets

* Bond yields broadly lower

* US 10-yr bond yields pull back from 10-month highs

* Regulator: Report China slowing US bond buys may be fake

* ECB Dec meeting minutes awaited

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices, adds quote)

By Dhara Ranasinghe

LONDON, Jan 11 (Reuters) - Euro zone government bond yields fell on Thursday after China’s regulator called a report about Beijing slowing or halting its U.S. bond purchases possibly erroneous, allowing a degree of calm to return to rattled world debt markets.

Fears about a withdrawal of the central bank stimulus that has long held borrowing costs down, combined with higher oil prices and hefty new bond supply, have in recent days soured sentiment in bond markets, pushing up yields in the United States, Europe and Japan.

The sell-off was given a new dimension on Wednesday after a report from Bloomberg News stoked fears that China may stop its U.S. bond buying.

China is the biggest foreign holder of U.S. government debt, with $1.19 trillion in Treasuries as of October 2017, according to U.S. Treasury Department data.

But a strong U.S. bond sale on Wednesday and comments from the Chinese regulator on Thursday that the report China could slow U.S. purchases may be “fake” bought some relief.

“It is true that China is one of the biggest external holders of U.S. Treasuries, along with Japan, which means that they do have enormous influence over how the market can and does move,” said Michael Hewson, chief market analyst at CMC Markets.

“With concerns starting to rise about a rise in inflation due to recent strength in oil prices it is understandable that bond markets might be nervous if a normally large buyer of U.S. Treasuries either stops buying them or even starts to sell large amounts.”

Euro zone bond yields fell 2-7 basis points (bps), with Germany’s 10-year Bund yield 2.5 bps lower at 0.46 percent and down from more than two-month highs around 0.49 percent hit the previous day.

Peripheral bonds outperformed their top-rated peers after Italy successfully sold six billion euros of bonds.

U.S. Treasury prices were also on firmer ground. Ten-year yields were at 2.54 percent — comfortably below Wednesday’s 10-month peak just shy of 2.60 percent.

There was also some relief from Japan, another source of pain for bond markets this week.

The Bank of Japan (BOJ) maintained the amount of its bond purchases on Thursday. A cut in its buying of longer-dated debt earlier this week had fanned worries the BOJ may be moving to turn off its stimulus.

Analysts said that with firmer growth and oil prices expected to feed through to higher inflation, the outlook for bonds remained bearish.

“We have strong momentum in the world economy, which is consistent with bond yields being materially higher than they are today,” said Chris Bailey, European strategist at Raymond James, a wealth management firm.

With speculation about a turning point in central bank policy, minutes from the European Central Bank’s December released later in the day were also in focus.

Reporting by Dhara Ranasinghe; graphic by Richard Leong; Editing by Catherine Evans, William Maclean

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