Euro zone bond yields rise as risk rally dents safe-haven demand

(Writes through )

By Dhara Ranasinghe and John Geddie

LONDON, July 20 (Reuters) - Euro zone bond yields rose on Wednesday, giving up early falls as upbeat company earnings boosted U.S (Other OTC: UBGXF - news) . and European stock markets at the expense of safe-haven bonds.

The European Commission said consumer confidence in the euro zone and European Union fell sharply in July, a new sign of weaker morale after last month's shock British vote to leave the European Union.

But the data was broadly in line with analysts' expectations, removing an incentive to hold euro zone bonds, which came under selling pressure as U.S. trade got under way.

Better-than-expected earnings from Microsoft (Euronext: MSF.NX - news) and Morgan Stanley (Xetra: 885836 - news) helped pushed the Dow Jones and Standard & Poor's stock indices to record highs.

And as sentiment towards risky assets improved, investors reduced their holdings of safe-haven bonds.

Germany's 10-year Bund yield rose 2 basis points to minus 0.074 percent, having reversed earlier falls.

Most other euro zone bond yields also rose 1-2 basis points, while 10-year U.S. Treasury yields climbed 3 bps to 1.59 percent .

Peripheral bonds, which often benefit from a pick-up in risk appetite, were the exception, with Spanish and Portuguese yields falling 2-3 bps each.

That helped narrow the gap between Spanish and German 10-year bond yields to about 122 bps, its tightest in four months.

"U.S. stocks are higher and earnings are better than expected, so that's having some impact on bonds this afternoon," said Patrick Jacq, European rate strategist at BNP Paribas (LSE: 0HB5.L - news) . "The risk-on environment is especially favouring the likes of Spain."

Germany sold new five-year bonds at a record low yield of minus 0.51 percent, although there were fewer bids than the amount on offer.

POST-BREXIT DATA CLUES

The European Commission said its monthly indicator of euro zone consumer morale decreased to -7.9 in July from an upwardly revised -7.2 in June.

Economists polled by Reuters had estimated a slightly higher drop, forecasting a fall to -8.0 in July.

Further signs that a tepid euro zone recovery is waning could raise expectations that the European Central Bank, which meets on Thursday, is gearing up for another round of monetary easing.

"It (Other OTC: ITGL - news) remains unclear how large a hit the European economies will be taking following the Brexit vote -- and that uncertainty is likely to linger," said RBC (Other OTC: RBCI - news) 's chief European macro strategist, Peter Schaffrik.

Friday sees the release of Markit (NasdaqGS: MRKT - news) 's "flash" PMI for the euro zone, providing an early steer on how companies have fared since the Brexit vote. Markit will also publish a one-off flash PMI reading for Britain on the same day.

Citing uncertainty over Britain's looming exit from the EU, the International Monetary Fund cut its global growth forecasts for the next two years on Tuesday. It lifted its euro zone forecast slightly for 2016, but cut its 2017 outlook by 0.2 percentage points to 1.4 percent.

For Reuters new Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets (Editing by Catherine Evans)