Euro zone bond yields rise on ECB remarks, Italy in focus

By Saikat Chatterjee

LONDON (Reuters) - German 10-year bond yields rose to a 2-1/2-week high on Monday after the European Central Bank's Francois Villeroy de Galhau said policymakers could give new guidance on the timing of its first rate hike as the end of its bond stimulus approaches.

The move higher in German debt - yields were set for their biggest daily rise in almost a month - rippled across bond markets, with most 10-year bond yields in the euro area up 3-5 basis points on the day.

The Bank of France governor said that whether the decision to end the ECB's net asset purchases came at its September or December meeting was "not a deep existential question".

With the U.S. Federal Reserve well into its policy-tightening cycle, investors are focusing on when other central banks will follow suit in unwinding unconventional policies such as quantitative easing which have pushed bond yields to record lows.

"I think the effect of quantitative easing is peaking and we see plenty of upward pressure on government bond yields globally as term premium remains very low," said Paul O'Connor, head of Janus Henderson's head of multi-asset investing, whose funds manage 5 billion pounds.

German 10-year bond yields rose to 0.61 percent, its highest levels since April 26. Both French and Belgian yields were up 4 bp respectively.

Central banks have been gradually reducing their presence in the bond markets. JP Morgan data showed 2017 was the peak in quantitative easing with about $2 trillion being pumped into global markets which has had an "anesthetizing effect" on financial markets.

That is expected to drop to less than half in 2018 and turn into negative territory next year at a time when the U.S. is expected to inject a large dollop of fiscal stimulus.

Other ECB rate setters speaking on Monday stuck to an upbeat assessment of the euro zone economy.

"The ECB is broadly content with the pricing of rate hikes in mid next year and today's comments tally with that," said Daiwa Capital Markets' head of economic research Chris Scicluna.

A market gauge of long-term inflation expectations rose to its highest since late February , while market expectations for a rate hike in June 2019 crept back up .

Italy remained in focus as the anti-establishment 5-Star Movement and the far-right League neared a deal that they hope will fuse their very different election platforms into a workable coalition government.

Though this combination was initially greeted as the worst case outcome for Italian markets before a general election, sentiment has since become a bit more optimistic due to an improving economy and the ECB operating with an exceptionally loose monetary policy.

Italy's 10-year bond yields was up 3 basis points on Monday at 1.91 percent, close to last week's six-week high of 1.94 percent.

The cost of insuring exposure to Italian sovereign debt rose to the highest level in nearly four weeks .

(To view a graphic on Euro zone periphery government bond yields, click: http://tmsnrt.rs/2ii2Bqr)

(Reporting by Saikat Chatterjee; Additional reporting by Dhara Ranasinghe; Editing by Matthew Mpoke Bigg)

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