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UPDATE 2-Euro zone bond yields track tentative market rebound

·2 min read

(Recasts, adds issuance details, Philip Lane and ECB data)

By Dhara Ranasinghe

LONDON, Jan 25 (Reuters) - Euro zone bond yields edged higher on Tuesday, tracking a tentative rebound by European equity markets after a deep sell-off that encouraged investors to buy safe-haven assets in sovereign debt markets.

Borrowing costs across the common currency bloc fell sharply on Monday as tensions between Russia and the West over Ukraine and rate-hike worries linked to Wednesday's U.S. Federal Reserve policy decision triggered a selling spree in global stocks.

But while a semblance of calm seemed to be returning to European bourses, sentiment remained fragile and Wall Street opened deep in the red.

At 1606 GMT, Germany's 10-year Bund yield was up 1.3 basis points on the day at -0.085%, above almost three-week lows hit the previous session.

Analysts said the near-term outlook for bond markets was positive, with geopolitical worries expected to support safe-haven debt for now.

"The downdraft in global stock markets, on the back of geopolitical tensions and Fed tightening worries, remains the main driver of government bonds this week," said ING senior rates strategist Antoine Bouvet.

"None of these are valid long-term drivers for a rates forecast, but we think they will continue to push yields down in the near-term."

RATE HIKES

Markets are positioned for four U.S. rate rises to contain sticky inflation and for one rate hike by the European Central Bank by year-end.

Philip Lane, the ECB's chief economist, told a Lithuanian newspaper that the central bank would tighten policy if inflation were seen holding above its target but said such a scenario appeared less likely for now.

"If we saw the data coming in to suggest that inflation would be too high relative to 2%, then of course we would respond," Lane told Verslo žinios.

Italy's 10-year bond yield was flat at around 1.35% after lawmakers failed to elect a new president in an initial secret ballot on Monday.

Euro zone bond markets also faced some selling pressure as they absorbed new supply. The Netherlands sold 30-year bonds and France sold a new 30-year inflation-linked bond via a syndicate of banks.

Orders for the new French bond were in excess of 23.5 billion euros, according to lead manager memos seen by Reuters'.

Separately, data published on Tuesday showed the ECB bought a net 13.424 billion euros ($15.13 billion) worth of assets last week as part of its quantitative easing programme, below the 25.922 billion euros it purchased a week earlier.

Germany's Ifo survey showed business morale in Europe's biggest economy improved in January for the first time in seven months, highlighting better growth conditions that could allow the ECB to dial back its monetary support. (Reporting by Dhara Ranasinghe; additional reporting by Julien Ponthus; Editing by Gareth Jones)

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