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Euro zone bond yields edge higher, spotlight turns to Powell

·2 min read

* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr

By Dhara Ranasinghe

LONDON, July 14 (Reuters) - Government borrowing costs in the euro area nudged up on Wednesday as weakness in U.S. Treasuries and looming supply from Germany weighed on the market.

Long-dated U.S. Treasury yields rose on Tuesday following demand for a $24 billion sale of 30-year bonds, which came after data showed inflation in June jumped more than expected.

With Germany set to issue 4 billion euros of 10-year bonds later this session, supply put some upward pressure on bond yields. Trade was generally subdued, however, ahead of testimony to Congress later this session from U.S. Federal Reserve chief Jerome Powell.

He will speak a day after data showed the U.S. consumer price index increased 0.9% last month, the largest gain since June 2008, after advancing 0.6% in May.

So far, the Fed and the European Central Bank have said that they will look past any near-term pick up in inflation, which is likely to be driven by one-off factors.

"It'll be interesting to see his (Powell's) response to the latest CPI report, particularly since markets responded by moving up the pace of future Fed hikes," said Deutsche Bank strategist Jim Reid.

In early trade, most 10-year bond yields in the euro area were 1-2 basis points higher on the day.

Germany's Bund yield was about one bps higher at -0.29% . It touched a one-week high at -0.28%, having dropped to more than three-month lows at around -0.34% last week as markets reassessed the outlook for world growth and inflation.

Analysts said an expectation that the European Central Bank would confirm its dovish stance at next week's policy meeting -- the first after a strategy review -- continued to support euro zone bond markets.

Florian Späte, senior bond strategist at Generali Investments, said he expected bond yields to rise further out.

"We don't think the recent drop in yields will last," he said. "Going forward, we think there is leeway for higher yields in the U.S. and Europe." (Reporting by Dhara Ranasinghe; Editing by Catherine Evans)