Euro zone yields edge lower, look past ECB loan repayment data

By Alun John

LONDON (Reuters) -Benchmark euro zone government bond yields edged down on Friday after comments from central bank policymakers, and largely shrugging off news that banks in the bloc will repay less than expected of their ECB loans.

European lenders are set to repay 296 billion euros ($307.1 billion) in multi-year loans from the European Central Bank next week, the ECB said on Friday.

That is less than the roughly 500 billion euros many analysts expected for the first voluntary repayment window of the ECB's Targeted Longer Term Refinancing Operation (TLTRO) since terms were changed last month.

The Italian two-year bond nudged up in price right after the announcement, with the yield last at 2.703% compared with 2.724% before. A higher-than-expected figure for repayments could have weighed on short-dated peripheral euro zone government bonds, according to analysts.

Longer-dated bonds were little affected by the news and Germany's 10-year government bond yield was last down 1 basis point at 2.01%. The Italian 10-year bond yield was 7.5 basis points lower at 3.88%.

ECB policymakers hinted at slower rate hikes on Friday but with a quicker start to debt run-off.

ECB chief Christine Lagarde said the central bank may need to raise interest rates so much that they dampen growth as it fights sky-high inflation.

The German 10-year yield, the benchmark for the euro zone, is on track for a weekly yield drop of around 14 basis points, after posting a slightly smaller fall the previous week.

This would be the first time either Italian or German 10-year yields have fallen for two weeks in succession since July.

Italy's 10-year yield is heading for a 32 basis-point weekly fall, its second drop in succession.

With falls in Italian yields outpacing German ones, the spread between the yields on the two countries' 10-year bonds tightened to 185 bps, at its lowest since May.

Richard McGuire, head of rates strategy at Rabobank, said two factors were driving the rise in European yields on Thursday and Friday: very hawkish rhetoric from the U.S. Federal Reserve and the British budget.

British Finance Minister Jeremy Hunt announced a string of tax increases and tighter public spending in a budget plan on Thursday and said the economy was already in recession and set to shrink next year

British government bond yields rose as a result which McGuire said was due to "the double whammy of visible belt- tightening being promised - but delayed - which saw the market speculate that the Bank of England does need to do more in the near term (to raise rates)."

The British 10-year gilt yield was last at 3.23%, up 3.5 basis points.

Meanwhile, across the Atlantic, St. Louis Fed President James Bullard said on Thursday interest rates might need to hit a range from 5-5.25% from the current level of just below 4.00% to be "sufficiently restrictive" to curb inflation, sending U.S. Treasury yields higher.

(Reporting by Alun John in LondonEditing by Emelia Sithole-Matarise and Matthew Lewis)