Euro Zone Bonds Sell off as ECB Rate Cut Seen as Less Likely

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LONDON, Jan 29 Reuters Euro zone government bond yields rose on Friday and the spread between core and riskier debt narrowed, as market participants saw a European Central Bank rate cut as less likely and euro zone GDP data was better than expected.

ECB governing council member Klaas Knot said on Wednesday that the ECB was ready to cut its deposit rate further below zero if necessary to keep its inflation target in sight. But five sources told Reuters on Friday that the ECB is unlikely to cut its already recordlow policy rate.

On Thursday, ECB policymaker Martins Kazaks also said that a rate cut is not needed.

Germanys 10year government bond yield was up around 3 basis points at 0.508 at 1205. Frances benchmark yield was up around 4 bps, at 0.2550, after reaching a twoandahalfmonth high of 0.292 earlier in the session .

I think that all government bonds right now are selling on the uncertainty that the ECB is causing through their communications, said Althea Spinozzi, fixed income strategist at Saxo Bank.

She said that Germany is also seeing an adjustment due to recent rises in U.S. treasury yields.

The periphery is selling off less for the reason that people that go to the periphery are in the periphery for the longterm gain, for the longterm spread compression, that they know will arrive, Spinozzi added.

At 1235 GMT, Italys 10year government bond yield was up by less than one basis point, at 0.648, and the spread between Italian and German bonds narrowed….

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