Bond yields rise as Fed defies weak data to hold course

LONDON: U.S. policymakers gave markets a reality check by pushing ahead with a tightening of monetary policy despite some weak economic data, pulling euro zone government bond yields off their recent lows on Thursday.

A rate hike was largely priced in but the Federal Reserve surprised the market by signalling it would begin selling assets accumulated over years of money-printing, potentially as early as September.

Having hit multi-week lows on Wednesday, euro zone government bond yields rose across the board, tracking a move in U.S. Treasuries overnight.

"The Fed has taken a cautious approach to balance sheet normalisation, but they have begun it and it´s definitely a tightening of policy," said ING strategist Martin van Vliet. "The meeting was definitely tilted towards the hawkish side. "Any action by the U.S. central bank tends to reverberate across the debt markets of developed countries, as many investors have European, U.S. and Japanese government bonds in their portfolio and switch between them when there are changes in yields. Large bond auctions by Spain and France put further selling pressure on government bonds as investors made room for the new supply.

Germany´s 10-year government bond yield, the benchmark for the region, rose 3 basis point to 0.27 percent, off a seven-week low hit on Wednesday at 0.225 percent.

The yield on 10-year U.S. Treasury yields rose as much as 4 basis points from a seven-month low of 2.10 percent hit after weaker-than-expected U.S. data on Wednesday. Lower-rated Italian and Spanish government bond yields - which tend to be most sensitive to any changes or tweaks on monetary policy - were up 6-8 basis points.

"The periphery had rallied the most on Wednesday, led by Portugal, so maybe investors are thinking hold on, we may have gone a bit too far," said Van Vliet. Greek government bond yields remained steady on Thursday ahead of a key Eurogroup meeting later.