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Major govt bond yields climb on German union wage bid

LONDON: Major government bond yields rose on Tuesday with euro zone debt prices hit the hardest after a key German trade union made a substantial wage rise claim and sparked inflationary fears within Europe.

The yield of the 10-year cash Bund hit 5.54 percent, rising in total by 11 basis points.

Germany's powerful IG Metall engineering union said its board recommended a wage rise of up to 5.5 percent in this year's wage round, higher than expected and launching a pay round likely to set the tone for much of Europe.

Though the actual pay rise is expected to be lower, analysts said the demands were severe and would reinforce the view that the European Central Bank will need to hike rates to fight inflationary pressures.

"The IG Metall story strengthens initial perceptions that the ECB will raise rates before the end of the first quarter," said Adam Chester, economist at Halifax Group in London.

"The market was under the conviction that the initial wage demand was 4.2 percent and coming in at 5.5 percent provided a bit of a shocker," he added.

Analysts said debt auctions in Austria, Portugal and the Netherlands had also put pressure on the market on Tuesday but had ultimately gone well.

Ifty Islam, global bond strategist at Deutsche Bank in London, said Tuesday's rise in Euroland yields was down to a generalised concern that central banks on both sides of the Atlantic will need to tighten interest rates in the first quarter of this year.

U.S. Treasuries took a back seat to the euro zone but bond prices were still sharply lower. The benchmark 30-year Treasury yield hit a new two-year high with the yield climbing eight basis points to 6.67 percent while the price declined a full point to 93-01.

Analysts said a batch of key data and a speech on Thursday by Federal Reserve Chairman Alan Greenspan could clarify the Fed's position on interest rates and this was making the market nervous.

Chester said hawkish comments overnight from Richmond, Virginia, Fed President Alfred Broaddus on the need for the Fed to act "preemptively" to control inflationary pressures, had also knocked the market.

A large pot of dollar-denominated corporate supply was also cited by dealers as negative for Treasuries.

Gilts ended sharply down, falling in sympathy with euro zone and U.S. Treasury markets.

The 10-year gilt fell 0.64 to 100.29, pushing the yield eight basis points higher to 5.71 percent.

The immediate focus for the gilt market is this week's Bank of England Monetary Policy Committee meeting which announces its decision on Thursday. Most analysts say the gilt market has already priced in a likely rate hike.-Reuters