Euro zone bond yields rise after hawkish remarks from Powell, ECB officials

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By Stefano Rebaudo

Nov 10 (Reuters) - Euro zone government bond yields rose on Friday after central bank officials on both sides of the Atlantic pushed against expectations for rate cuts soon, saying the fight against inflation was not over.

U.S. Treasury yields rose in London trade, with the 10-year up 1.5 basis points (bps) to 4.64% after climbing almost 11 bps the day before, after a weaker-than-expected 30-year bond auction and remarks from Federal Reserve Chair Jerome Powell suggesting policy rates could rise again.

European Central Bank policymaker Joachim Nagel said on Wednesday it was far too early to talk about cutting rates as inflation is a "very greedy beast" that is hard to beat. ECB Vice President Luis de Guindos then made similar comments.

Germany's 10-year government bond yield rose 8 bps to 2.70%, after increasing 4 bps the day before. It hit early this week 2.606%, its lowest level since Sept. 15. It was on track to end the week 6 bps higher.

"Rates markets remain nervous after a number of Fed and ECB officials reminded that further tightening is still possible if needed," said Francesco Di Bella, rate strategist at Unicredit.

"That said, a clear trend has not emerged across euro zone rates markets so far this week, and yields are just a few basis points higher than a week ago," he added.

BTP investors were showing moderate signs of anxiety heading into Friday's Fitch review of Italy's rating, with spreads versus Bunds earlier this week having hit their widest level since Nov. 2.

The gap between Italian and German 10-year bond yields was at 186 bps after reaching 189.9 on Wednesday.

It hit on Monday 177.70 bps, its tightest since Sept. 21.

"We expect rating agencies to give euro-sovereigns the benefit of the doubt in the absence of domestic political shocks; we don't expect BTPs to lose their investment grade rating next year," said Michael Leister, head of interest rate strategy at Commerzbank.

Analysts argued that government deficit projections for next year remain consistent with a high pace of fiscal consolidation in 2024, which should support expectations of a primary balance adjustment over the coming years.

Investors will focus on Moody's update due on Nov. 17 as the high level of debt makes Italy more vulnerable to shocks. Moody's has a Baa3 rating -- one notch above the non-investment grade level -- with a negative outlook.

Portugal's government bonds were in line with their peers on Friday, with the yield spread versus the German Bund, which remained well-behaved this week after the resignation of Prime Minister Antonio Costa amid a corruption investigation.

The gap between Portuguese and German 10-year yields on Tuesday widened to 74.2 bps, its highest level in a month, and was last at 70 bps. It has fluctuated between 60 and 75 bps since late June.

Portugal will hold a snap parliamentary election on March 10, its second in as many years.

Spain's yield spread widened to 109 bps in Asian trade but was last at 104.4 bps, within striking distance of its lowest level since early September of around 101 bps.

The political temperature in Spain has risen as acting Prime Minister Pedro Sanchez bids to clinch another term in office, while on Thursday the former head of the centre-right People's Party in the Catalonia region was shot in the face. Hospital authorities said his life was not in danger.

Negotiations between France and Germany on new fiscal rules remain in the background. (Reporting by Stefano Rebaudo; Editing by Toby Chopra and Peter Graff) ;))