February 5, 2018 / 8:34 AM / 16 days ago

UPDATE 3-World bond market rout pauses as yields pull back from highs

* EZ bond yields dip 1-2 bps

* German, US 10-year yields pull back from highs

* Markets pause after post-payrolls selloff

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

By Dhara Ranasinghe

LONDON, Feb 5 (Reuters) - Long-term borrowing costs in Germany, the euro zone’s biggest economy, pulled back from around two-year highs on Monday as bond investors paused for thought after a sharp sell-off prompted by fears about resurgent inflation.

Friday’s U.S. payrolls report showed wages growing at their fastest pace in more than 8-1/2 years, fuelling expectations of both higher inflation and more interest-rate rises from the U.S. Federal Reserve than previously anticipated.

U.S. and German 10-year bond yields hit fresh multi-year highs in early European trade on Monday. But without fresh impetus the momentum fizzled, allowing bond yields to pull back.

In addition, ECB President Mario Draghi warned in a speech that currency market volatility may prove an obstacle for inflation, remarks that potentially kept yields lower as well.

“The market is still struggling to find an equilibrium and particularly to assess the upside for yields,” said Commerzbank rates strategist Michael Leister.

“Bund yields are fairly close to 0.80 percent ... a key factor in the market. Most of the recent moves were driven by the U.S., with Treasury yields trading at almost 2.90 percent, with at least probably some marginal willingness on behalf of investors to scale into the market again at those levels.”

German 10-year Bund yields fell 2 bps to 0.74 percent , off almost 2-1/2 year highs of 0.774 percent hit in early trade. German 30-year bond yields were flat having touched two-year highs earlier at 1.429 percent.

Two-year bond yields were down slightly on the day, leaving the German curve out to 10 years at its steepest since mid-2014 .

U.S. 10-year Treasury yields fell away from 4-year highs at around 2.84 percent.

Still, analysts said sentiment towards bond markets was likely to remain bearish especially as investors ratchet up expectations for U.S. rate rises this year.

“The average earnings data from the U.S. was strong enough to suggest the bearish sentiment will not dissipate soon,” said Richard McGuire, head of rates strategy at Rabobank.

Futures markets price in the risk of three, or even more, interest rate rises from the Fed this year. Just a few weeks ago they had anticipated around two rate hikes this year.

Bond markets across the world have started 2018 on a weak footing as strong economic data and signs of a pick-up in inflationary pressures stoke a perception that major central banks could step back from ultra-easy monetary policies sooner rather than later.

For now, U.S. bond markets are setting the tone for euro zone peers, said analysts, with many expecting 10-year Treasury yields to test 3 percent soon.

Reporting by Dhara Ranasinghe; Additional reporting by Fanny Potkin; Editing by Matthew Mpoke Bigg

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