Euro zone bond yields rise as Britain holds rates post-Brexit

By John Geddie

LONDON (Reuters) - Euro zone bond yields rose on Thursday after the Bank of England wrong-footed investors by holding interest rates steady at its first meeting since Britain's vote to leave the EU last month.

While the BoE said it was likely to deliver stimulus soon, markets had been priced for the first cut in more than seven years as Britain's economy reels from last month's Brexit vote. Sterling, British and other benchmark bond yields rose after the decision, as stocks fell. [GBP/]

BoE meetings have in recent years had little impact on the continent, especially as the Bank has held interest rates steady since 2009, but the uncertainty Brexit has layered on top of stuttering global growth could require another round of stimulus from major central banks elsewhere.

The BoE said it was likely to deliver stimulus in three weeks' time, possibly as a "package of measures" once it has assessed how the June 23 referendum decision to leave the European Union has affected the economy.

Money markets now price around a 20 percent chance that the European Central Bank cuts rates by 10 basis points to minus 0.50 percent next week, having seen around a 30 percent chance before the BoE decision. A cut is fully priced in by year-end.

"While the ECB will not act directly just because the Bank of England has done something, any change in growth outlook in Britain is very likely to also impact growth in Europe, which will be followed very closely by the ECB," said Michiel de Bruin, head of global rates at BMO Global Asset Management.

"I wouldn't be surprised if the ECB continues to loosen monetary policy and demand for bonds will stay elevated, clearly."

German 10-year bond yields, the euro zone benchmark, rose 5 basis points on Thursday to minus 0.09 percent, near a one-week high of minus 0.08 percent hit on Wednesday. British equivalents were up 6 bps at 0.81 percent.

Both though remain within sight of record lows, as worries about a sluggish global economy has reinforced demand for safe haven bonds even at implausibly low yield levels.

Germany became the second G7 nation after Japan to issue 10-year bonds with a negative yield on Wednesday, while Switzerland sold bonds maturing in 2058 at a negative yield. There was also robust demand for 30-year U.S. debt resulting in a record low yield on this maturity at auction.

"The BoE's decision eases pressure on the ECB to act immediately," said Nick Stamenkovic, bond strategist at RIA Capital Markets. "But further easing is likely, probably in September."

(Additional reporting by Dhara Ranasinghe; Editing by Tom Heneghan)