July 26, 2018 / 7:36 AM / 4 months ago

UPDATE 2-Euro zone yields up as EU-U.S. trade boost supports no change by ECB

(Adds Japanese government bond yield, updates prices)

By Abhinav Ramnarayan

LONDON, July 26 (Reuters) - Euro zone government bond yields rose on Thursday on hopes that a trade war between the European Union and the United States will be averted, supporting European Central Bank plans for a very gradual withdrawal of monetary stimulus.

The ECB is due to release its policy decision on Thursday followed by a news conference by its chief Mario Draghi. Existing plans for a gradual tightening in coming months and into next year are expected to be kept in place.

After meeting U.S. President Donald Trump on Wednesday, European Commission President Jean-Claude Juncker said he had secured a major concession on car tariffs, easing the threat of a transatlantic trade war.

German Bund futures opened 42 ticks lower at 161.95 on Thursday while euro zone bond yields — which have been compressed in recent weeks by fears of a trade war — were up 2-3 basis points across the board.

Germany’s 10-year yield, the benchmark for the region, was up 3 bps at 0.42 percent, flirting with a one-month high of 0.424 percent hit on Tuesday.

“I think one can say that the risks of a trade war are much lower, so for the medium term I think it helps the ECB to keep on the current pathway,” said Sebastian Fellechner, strategist at DZ Bank.

“Especially for today’s meeting, we expect no changes in monetary policy.”

Attention will likely centre on whether Draghi elaborates further on how the ECB will deploy redemptions from its bond purchases after the scheduled close of the quantitative easing programme at the end of 2018.

“We tend to think that it will be difficult for Draghi to deliver as dovish a tone and outlook as (after the last ECB policy meeting) in June, given the lack of policy changes,” Mizuho analysts said in a note.

Therefore, euro zone bonds could be driven by other factors such as bets on policy tightening in Japan or by market positioning for a strong U.S. GDP reading on Friday, they said.

Japan’s 10-year government bond yield hit 0.10 percent for the first time in over a year, before closing at 0.085 percent.

Reporting by Abhinav Ramnarayan; Editing by John Stonestreet and Stephen Powell

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