January 10, 2018 / 8:41 AM / a year ago

UPDATE 3-German yields highest since October ECB meeting as sentiment sours

* Italy, Portugal syndication plans push yields higher

* Bank of Japan tweak puts spotlight on central banks

* Global growth adds to speculation on bond market

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

By Abhinav Ramnarayan

LONDON, Jan 10 (Reuters) - Germany’s 10-year bond yield hit its highest level since the European Central Bank extended and cut its bond buying scheme in October, as speculation over central bank tightening and new euro zone debt supply soured investor sentiment on Wednesday.

A mix of factors, including global growth and higher oil prices, has pushed yields higher in recent days as investors speculate that central banks globally will tighten policy.

Some investors saw a Bank of Japan reduction of bond purchases this week as a potential early signal of this.

U.S. 10-year Treasury yields, lifted on Tuesday by the BoJ news, hit fresh 10-month highs around 2.60 percent on Wednesday after a Bloomberg report that Chinese officials are recommending lower U.S. government bond purchases.

“Watching the BOJ is quite important because if they start to move on that, that’s your last major central bank liquidity provider disappearing,” David Zahn, Franklin Templeton’s head of European fixed income, said.

The yield on Germany’s 10-year government bond , the benchmark for the bloc, was 1 bps higher at 0.475 percent. The gap with its U.S peer widened to around 212 bps on the day, its highest since April 2017.

In Europe, indicators have pointed towards a strong economic performance in 2018, which in turn puts pressure on the ECB to withdraw extraordinary stimulus - due to run until September at least - sooner rather than later.

Though inflation is still well below the ECB’s target, some suggest this could soon change soon and investors are keeping an eye on a German wage dispute, with the country’s biggest union demanding an inflation-busting 6 percent pay hike this year.

A sharp rise in oil prices could also push inflation higher worldwide. U.S. crude prices on Wednesday touched their highest since December 2014.

Meanwhile, other analysts pointed to a spike in supply as another cause for rising yields.

“Italy and Portugal announced syndications overnight and many financials are hitting the screens as well, so many international investors are shifting their portfolios to make room for this supply,” DZ Bank analyst Pascal Segesser said.

Italy generated over 26 billion euros of demand for a 20-year bond sale, while Portugal received over 17 billion euros of orders for a 10-year bond syndication.

Germany sold just over 4 billion euros of 10-year bonds in an auction, short of its 5 billion euro target.

The yield rises are prompting bond investors to ask whether this is the start of a sustained bear market.

“We have had some strong growth numbers at the start of the year and there’s some questions on whether the central banks will finally change their stance,” DZ Bank’s Segesser said. (Reporting by Abhinav Ramnarayan; Additional reporting by Dhara Ranasinghe and Fanny Potkin; Editing by Mark Heinrich and Alexander Smith)

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