France, Spain to sell bonds; Italy bond exchange due

Government bond yields across the euro area rose on Thursday, pushed up by hints of more rate hikes from the U.S. Federal Reserve and in anticipation of a wave of fresh supply from France, Spain and Italy.

Government bond yields across the euro area rose on Thursday, pushed up by hints of more rate hikes from the U.S. Federal Reserve and in anticipation of a wave of fresh supply from France, Spain and Italy.

Indeed, the bond sells off was led by Italy with the gap between 10-year bond yields and German peers moving back towards five-year highs seen last week at around 315 basis points.

The U.S. central bank is largely united on the need to raise borrowing costs further, minutes released on Wednesday from the Fed's September meeting showed.

Every Fed policymaker backed the September decision to raise the target policy rate to between 2 per cent and 2.25 per cent, according to the minutes.

That pushed up U.S. Treasury yields, setting the tone for the start of European trade with bond investors also positioning for new supply.

France is expected to sell up to 8 billion euros of bonds, Spain is tipped to auction almost 5 billion euros of debt and Italy is due to hold an exchange auction -- tapping five nominal bonds in exchange for its April 2020 BTP Italia retail linker.

"It's difficult to see anything shocking in the Fed minutes, so maybe some investors were waiting for that come out to sell U.S. Treasuries," said Commerzbank rates strategist Rainer Guntermann.

Ten-year bond yields across the bloc rose 2-4 bps.

Germany's 10-year Bund yield was up 2 bps at 0.48 per cent, up from Wednesday's two-week low at 0.45 per cent.

Two-year German yields hovered near six-week lows and with their U.S. peers trading higher a day after the hawkish Fed minutes, the gap between the two held close to its widest in 30 years.

Italy's bond market, which had shown signs of some recovery earlier in the week, was on the back foot again ahead of the bond exchange.

Italian 10-year bond yields were up 4 bps at 3.59 per cent. The Italian/German 10-year bond yield spread widened to 311 bps -- its highest since Oct 9, when it hit its widest in more than five years.

"Today's Spanish auction and Italian exchange create steepening risk for peripheral curves," Mizuho said in a note.

Italy's contentious 2019 budget remained in focus.

Italian Prime Minister Giuseppe Conte said on Thursday he expects criticism from the European Commission on Italy's expansionary budget.

(With inputs from agencies.)