Euro zone bond yields extend post-Fed rise

·2 min read

Jan 28 (Reuters) - Euro zone bond yields rose further on Friday as markets continued to digest the more hawkish than expected message that emerged from the U.S. Federal Reserve policy meeting earlier this week.

Germany's 10-year yield, the benchmark for the euro zone, rose some 2 bps in early trade. It was up half a bp to -0.05% by 0830 GMT, below the -0.023% reached at one point on Thursday.

Moves were smaller than in the U.S., where 10-year yields were last up around 2 bps.

Euro zone bond yields had risen on Thursday as traders ramped up their bets on rate hikes from the European Central Bank this year following moves in U.S. money markets, which priced in nearly five Fed hikes this year.

Investors' focus was also on Italy, where bond yields were back up after a late afternoon rally on Thursday while its parliament struggled to elect a new president.

Parliament will make a fifth attempt to elect a new president on Friday.

Party chiefs had sounded more confident on Thursdaty about finding a mutually acceptable candidate for the powerful role.

However, center-right parties also said they will try to push through a candidate from their own ranks. There was also a growing possibility that incumbent president Sergio Mattarella could be re-elected.

Prime Minister Mario Draghi remains a contender, but his prospects have faded this week, with many lawmakers clearly reluctant to back him, partly because they fear any change to the government could trigger an early election.

Italy's 10-year yield was up 4 bps to 1.40%, with the closely watched risk premium over Germany at 144 bps, below a 16-month high touched this week over 150 bps.

"While a president has yet to be voted into office, hopes are accordingly running high that a compromise will eventually be reached to keep Draghi on board," said Michael Leister, head of interest rate strategy at Commerzbank.

"The news-flow remains fluid, however, and banking on such a compromise seems premature."

Italy will also be in the primary market with an auction to raise up to 8 billion euros from five- and 10-year bonds and a seven-year floating-rate bond.

Investors were also awaiting data releases, with the German fourth quarter GDP release and the U.S. personal consumption expenditure price index figure -- the Fed's preferred inflation gauge -- later in the session. (Reporting by Yoruk Bahceli; Editing by Simon Cameron-Moore)