German bond yields pinned near five-week highs

LONDON: German government bond yields held near five-week highs on Wednesday with short-dated U.S. Treasury yields near decade peaks as a return of risk appetite in broader markets dampened demand for safe-haven paper.

Italian government bond yields continued to rise as the country's bonds underperformed ahead of an auction on Thursday, after snapping six-sessions of falls on Tuesday.

Germany's 10-year bond yield, the benchmark for the region, was around a basis point lower at 0.42 percent but holding close to five-week highs hit on Tuesday.

German bonds yields have risen since last week as hopes for a Brexit deal and fiscal restraint in Italy boosted risk appetite. Bund yields were also pulled higher by higher yields in the U.S. Treasury market.

U.S. Treasury yields remained near Tuesday's highs. The yield on the two-year note hit its highest level in a decade for the third day in a row on Tuesday, following a report of a record number of job openings in July, and as $144 billion in new supply on offer this week weighed on prices..

"U.S. yields going up has been the major driver," said Salman Ahmed, chief investment strategist at Lombard Odier.

"Earlier there was a lot of fear the Italian budget was going to be gravity-defying but that risk has come down at the margins and that risk premium has been taken out."

Short-dated Italian yields were up five to six basis points

and the 10 year-bond yield rose three basis points to 2.80 percent, having hit a six-week low on Tuesday at 2.7 percent.

Italian bond yields had fallen around 50 bps since the end of August and analysts suggested that some investors may be taking profits ahead of Thursday's Italian bond auction.

Italy's Treasury plans to sell up to 7.75 billion euros ($9 billion) over three BTP bond issues.

However, analysts added that while the market continues to be soothed by receding budget concerns, with Italian politicians reiterating that Italy's budget will adhere to EU budget rules, the contents of the planned budget may not be so market friendly.

"The wording of the Italian government is more market orientated and there are positive signs that the first budget draft will have a deficit of below three percent," said DZ Bank rates strategist Daniel Lenz.

"But we are still concerned that some of the details of the budget proposal won't suit the market very well and (the question is) how will they finance these extra expenditures?"

Elsewhere in the euro zone, bond yields were flat to marginally higher. Supply is due on Wednesday from Portugal which is expected to raise between 0.75 - 1 billion euros of bonds.

Germany is also due to sell 1 billion euros of bonds maturing 2048.

Strong appetite for new peripheral debt was seen on Tuesday when Spain's 15-year inflation linked bond sale attracted orders of more than 18 billion euros.