LONDON: Euro zone government bond yields edged further towards multi-year highs on Thursday as a budget agreement in the United States and a coalition deal in Germany pointed to higher spending on both sides of the Atlantic.
Germany's pro-spending Social Democrats (SPD) are set to head the finance ministry in a coalition government, while US Senate leaders reached a deal on Wednesday to raise spending on military and domestic programmes by almost $300 billion over the next two years.
A number of policymakers were due to speak on Thursday, and with two of the world's largest economies now expected to loosen the purse strings in the coming years, investors will be watching to see if rate setters expect to tighten monetary policy as a result.
"SPD getting the finance ministry (in Germany) means more social expenditure and perhaps also a less restrictive stance on southern Europeans," said DZ Bank strategist Daniel Lenz.
Yields across the euro zone rose 1-2 basis points in morning trade and headed back towards multi-year highs, having briefly been pulled down by a "safe haven" bid during Tuesday's stock market slump.
Germany's 10-year government bond, the benchmark for the region, saw its yield rise over a basis point to as much as 0.767 percent; heading back towards the two-year high of 0.774 percent hit earlier in February. Most other euro zone bond yields were up 0-1 bps.
This came after 10-year US Treasury yields rose to a high of 2.86 percent overnight.
Greece launched a new seven-year bond sale on Thursday, announced earlier this week and which should cement Athens' bond market credentials, particularly coming so soon after Tuesday's severe stock market crash.
Italian, Spanish and Portuguese government bonds slightly underperformed, their yields rising around 1 basis point, but only after having fallen sharply the day before.
All three are still trading close to their tightest levels over Germany in months, and in some cases, years. Having a pro-European, pro-spending party at the heart of German government is seen as positive for these southern European countries.
The European Central Bank's chief economist Peter Praet said on Thursday that a benchmark salary increase secured by Germany's largest trade union this week was "fully in line" with the ECB's inflation forecasts.
Across the Atlantic, the US Federal Reserve's Robert S. Kaplan said three rate increases this year remain the central bank's base case scenario regardless of the recent stock market rout. Earlier in the day, Bundesbank President Jens Weidmann said the euro's strength and the recent stock market rout do not justify any substantial extension of the European Central Bank's bond purchase scheme.
The ECB's Francois Villeroy de Galhau and the Fed's Patrick Harker were also due to speak later on Thursday.
Markets were also awaiting the Bank of England's rate decision at 1200 GMT. Analysts expect the BoE to keep rates on hold given the economic uncertainty that hangs over the UK, but it could telegraph a hike as early as May.
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