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Yellen, Trump tax plan push up eurozone bond yields

[LONDON] Eurozone bond yields rose sharply on Wednesday after US Federal Reserve chief Janet Yellen confirmed the outlook for further rate rises and as markets braced for President Donald Trump's administration to outline a new tax plan.

Two-year US Treasury yields climbed to their highest level since October 2008 after Yellen said late on Tuesday it would be "imprudent" to keep rates on hold until US inflation hit two per cent.

That set the tone for bond trading in Europe with selling in US and European markets gathering momentum as focus turned to US tax reform.

The Trump administration and Republicans in Congress are due to unveil a tax plan later on Wednesday.

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If passed, it would be the first significant legislative victory for US President Donald Trump since taking office in January.

"I think the idea that Trump could be reaching across the aisle, talking about tax cuts to middle and low income households, if it comes to pass, we are talking a pretty material fiscal boost to the US economy," said Mark Dowding, co-head of investment grade at BlueBay Asset Management.

"This sort of easy fiscal policy is why the markets are reacting the way they have."

Most euro zone bond yields were 2-6 basis points higher across the board.

In Germany, the euro zone's benchmark bond issuer, 10-year bond yields were 6 basis points higher on the day at 0.47 per cent - 8 bps above an 11-day low set on Monday.

US Treasury yields extended their rise in European trade, with 10-year yields hitting an eight-week high of 2.30 per cent .

"Fundamentally, Yellen's statement reinforces the view that she supports the path for tighter monetary policy," said Chris Scicluna, head of economic research at Daiwa Capital Markets. "

That triggered the move in bonds but the fact that we should hear something more substantive on tax reform today is adding to the selloff," he added.

In the eurozone, analysts said the focus remained on Catalonia where a referendum on independence is due to take place this weekend.

Spain's government said on Tuesday that police would take control of voting booths in Catalonia to help thwart the independence referendum that Madrid has declared illegal.

The dispute has plunged Spain into one of its biggest political crises since the restoration of democracy in the 1970s after decades of military dictatorship.

While Spanish bonds have remained relatively resilient, analysts said the bond market could be vulnerable to a sudden shift in investor sentiment.

The gap between Spanish and German bond yields - a gauge of how investors view relative risks - stood at 115 bps on Wednesday.

REUTERS