Bund yields rise amid UK, US rate hike hints

LONDON: German Bund yields rose on Wednesday after Bank of England minutes and data hinting at a rebound in the U.S. housing market provided evidence that a rate hike in both the UK and the U.S. could be on the cards.

Bond traders and brokers said the move was exacerbated by pressure on the Bund future which traded through a technical level, prompting some investors to automatically sell.

"The BoE minutes were quite hawkish and maybe they acted as a trigger for those who ... were seeking to cut their Bund positions ahead of the (Fed) minutes," said Cyril Regnat, fixed income strategist at Natixis.

BoE minutes showed two policymakers again voted for a UK rate hike despite a weaker economic outlook - -- a hawkish stance that some in the market anticipate from the Fed as well.

There had been speculation that at least one previous voter for an immediate increase in interest rates might have backed down this month due to the increasing risk that weakness in the euro zone economy will start to affect British growth.

But the fact that neither Ian McCafferty nor Martin Weale changed their minds raised concerns that the wording of the Federal Reserve minutes due later might contain a similar surprise and increased selling pressure on top-rated bonds.

Data on Wednesday showed a jump in U.S. housing permits to a 6-1/2 year high, a promising sign even though housing starts dipped unexpectedly in October.

Improving economic data is key to convincing the Fed to hike rates, a move markets expect in the middle of 2015.

Highly-rated bonds such as Bunds, British gilts and U.S. Treasuries often move in sync due to their perceived safe-haven status, and the prospect of rate hikes in one of those economies usually affects borrowing costs in the other two as well.

Ten-year Bund yields, which set the standard for euro zone borrowing costs, rose 4 basis points to 0.84 percent, having traded as low as 0.79 percent earlier.

Meanwhile, equivalent gilts rose 2 bps to 2.14 pct, and Treasuries jumped 3 bps to 2.35 pct.

Market watchers said the move in German yields was exaggerated by technical trading in the Bund future, as investors booked profits as the steady rise in price of the contract since the end of October tailed off.