Euro zone bond yields tumble, reflation trades suffer setback after Trump

By Dhara Ranasinghe

LONDON (Reuters) - German bond yields moved further away from recent three-week highs on Thursday, after U.S. President-elect Donald Trump shed no light on his future fiscal policies at a long-awaited news conference.

Since his election win on Nov. 8, stocks have soared and bonds have taken a beating on expectations that the economic policies of a Trump administration would fuel growth and inflation.

But at his first news conference since the election, Trump on Wednesday gave no details on tax cuts and infrastructure spending, putting a dent in the reflation-driven rise in bond yields in recent months.

Germany's 10-year bond yield, the benchmark for borrowing costs in the euro area, fell 5 basis points to 0.21 percent - its lowest level in just over a week. It is down about 12 bps from a three-week high hit on Monday.

Other euro zone bond yields fell 2 to 6 bps as U.S. 10-year Treasury yields fell to their lowest level in more than a month at around 2.31 percent. U.S. yields remain almost 50 bps above where they traded just before the U.S election.

"Overall, investors are wary ahead of Trump's inauguration - a case of buy the talk (Trumpflation), but sell the news," analysts at Societe Generale said in a note.

The release later in the day of the minutes of the European Central Bank's December meeting could limit any falls in euro zone bond yields, analysts said.

The ECB last month trimmed its asset buys in a surprise move but promised protracted stimulus to aid a recovery in the euro zone economy.

It also tweaked its bond-buying programme to address a scarcity of bonds, but those changes have done little to benefit countries such as Portugal and Ireland.

"We'll closely scrutinise the minutes for signs of opposition to the extension of the programme and also for any discussion on raising the share limits," said Martin van Vliet, senior rates strategist at ING.

"The fact that they didn't increase that has implications for smaller markets such as Ireland and Portugal."

Italian bonds yields lagged the fall in regional peers ahead of a sale of government debt later in the day.

Sentiment towards Italian debt improved on Wednesday after a key court rejected a bid by Italy's biggest labour union to hold a referendum on recent rule changes that made it easier to fire workers.

Still, Italian bonds face another test on Friday, when ratings agency DBRS is set to announce the results of a review of the country's credit rating.

(Editing by Hugh Lawson)