October 20, 2017 / 7:50 AM / in a year

UPDATE 3-U.S. tax vote triggers euro zone bond sell off

* Investors shed bonds as “Trumpflation trade” evoked

* Euro zone yields rise 2-4 bps, tracking U.S.

* Moody’s to review Spain’s rating on Friday evening

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds Nowotny comments, updates prices)

By Abhinav Ramnarayan

LONDON, Oct 20 (Reuters) - Euro zone government bond yields rose across the board on Friday, tracking a similar move in the United States after lawmakers there approved a budget measure that brought the “Trumpflation trade” back into focus.

President Donald Trump’s drive to overhaul the U.S. tax code cleared a critical hurdle when the Senate approved a budget blueprint that will pave the way for Republicans to pursue a tax-cut package without Democratic support.

“This basically means we could see the revamp of the Trumpflation trade,” said ING strategist Martin van Vliet. “There are still some steps to go but the bottom line is that the door to tax cuts has opened a bit further.”

Thursday’s vote pushed 10-year U.S. Treasury yields to their highest in more than a week at 2.3650 percent. The “transatlantic spread” with equivalent German yields stretched to 197 basis points, its widest since June.

The spread highlights the contrast between the European Central Bank’s cautious approach to the withdrawal of extraordinary stimulus and the potential for rate hikes and a fiscal boost in the United States.

But on Friday, the euro zone did track the U.S. move, with yields rising 2-6 bps across the board. The German 10-year yield, the benchmark for the region, rose more than 5 bps to a one-week high of 0.44 percent.

Expectations that ECB policymakers will take a cautious approach to the withdrawal of stimulus when they meet next week had pushed most high-rated euro zone yields lower over the past week.

The central bank is likely to decide next week to ease its asset purchases while avoiding an abrupt cut in their volume, ECB policymaker Ewald Nowotny said on Friday.

Later on Friday, Moody’s is scheduled to review Spain’s sovereign rating, days after warning that political tensions between Madrid and the secessionist leadership in Catalonia were credit-negative for the sovereign.

On Thursday, Spain’s central government said it would impose direct rule on the region after its leader threatened to go ahead with a formal declaration of independence.

Moody’s rates Spain at Baa2 with a stable outlook.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets

Reporting by Abhinav Ramnarayan; Editing by Catherine Evans and Andrew Heavens

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