UPDATE 2-Euro zone bond yields rise, German curve steepens

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(Recasts, adds comment, updates prices)

By Yoruk Bahceli

Oct 19 (Reuters) - Euro zone bond yields rose across the curve on Tuesday and benchmark issuer Germany's yield curve steepened after sharp moves on Monday had pushed it to the flattest in months.

Short to medium-dated German bond yields had risen sharply on Monday while longer-dated bond yields fell, with developed bond markets shaken up across the board as bets grew that the Bank of England is planning back-to-back interest rate rises in November and December.

A flattening bond yield curve is a sign that markets expect interest rates to rise in the coming months but the future economic growth outlook is becoming more cautious.

On Tuesday, euro area bond markets undid some of that move and long-dated German 30-year yields were up nearly 5 basis points (bps) to 0.29% at 1340 GMT, rising more than they fell on Monday.

That steepened the yield curve measured by the gap between 10 and 30-year yields to as high as 41 bps after it narrowed to the tightest since January at around 38 bps, while other parts of the yield curve also steepened.

Germany's 10-year yield, the benchmark for the bloc, was up over 3 bps to -0.11%, just above Monday's highs.

The yield spread between 10-year Italian and German bonds was at 105 bps, after rising to 107 bps on Monday - the highest in nearly two weeks.

"I think in a way it's just a little bit of a pause for breath from yesterday," said Lyn Graham-Taylor, rates strategist at Rabobank, noting how fast markets had moved on Monday.

Market focus on Tuesday is on European Central Bank speakers, particularly ECB chief economist Philip Lane at 1400 GMT.

Caught up in Monday's sell-off, money markets moved to price in a full 10 bp rate hike by the ECB by September 2022, having previously priced in a full hike in December 2022.

Analysts also said growing rate hike bets would have been expected to cause sharper moves on the yield spreads between Southern European and German bonds and a meaningful rise in euro zone inflation-linked, or real, bond yields.

ECB policymaker and French central bank chief Francois Villeroy de Galhau said there was no reason why the bank should increase rates between now and the end of next year.

But other policymakers, Finnish central bank governor Olli Rehn and Slovenian central bank governor Bostjan Vasle, pointed to risks of higher inflation

And data showed the ECB's asset purchases increased last week.

Investors will also watch several speakers from the Bank of England and the U.S. Federal Reserve later in the session, as moves in euro area bonds have been largely driven by their respective bond markets.

In the primary market, Finland raised 941 million euros from the re-opening of a 10-year bond at auction. (Reporting by Yoruk Bahceli; Editing by Ana Nicolaci da Costa and Mark Potter)

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