Investors shed euro zone bonds on further signs of economic strength

By Abhinav Ramnarayan

LONDON (Reuters) - Investors sold euro zone government bonds on Friday as reports on private-sector activity in the bloc provided further signals of economic growth, strengthening the case for a withdrawal of monetary stimulus.

Despite uncertainty over a delayed U.S. healthcare vote that may have implications for the "Trumpflation" trade, euro zone government bond yields rose 1 to 4 basis points on Friday.

The rise came as a survey showed businesses across the euro zone ramped up activity at the fastest pace in almost six years in March to meet burgeoning demand. French and German business activity also expanded more than expected in March .

Any reading above 50 on the PMI index suggests expansion, and the French number was 57.6, the German 57.0 and the euro zone equivalent was 56.7.

"It will be a confirmation of the economic strength in the euro zone, and that means there's more of a case for the ECB to tighten (monetary policy)," said DZ Bank strategist Christian Lenk.

Euro zone inflation surged to a four-year high in February, zooming past the European Central Bank's target and putting pressure on rate setters to open talks about when and how the bank's stimulus measures will be scaled back.

This has seen bond yields rise inexorably since, with the yield on Germany's 10-year bonds, the benchmark for region, rising 19 basis points in March so far. It was up 1.5 bps on Friday to 0.44 percent.

Other high-rated bond yields were up 1 to 2 basis points, while lower-rated South European countries saw government bond yields rise 3 to 4 bps.

The likes of Italy, Spain and Portugal generally move most on expectations of tightening as they are seen as the biggest beneficiaries of the European Central Bank's bond buying scheme.

TRUMPFLATION DOUBTS

The rise in yields came even though doubt has grown over U.S. President Donald Trump's ability to deliver fiscal stimulus measures promised during his election campaign last year.

The success of a key healthcare bill later on Friday will be a signal of whether Trump can get growth and inflation-boosting measures passed into law in the world's richest country.

Global bond yields and stock markets have risen sharply since December on expectations of "Trumpflation", but U.S. stocks suffered their biggest daily fall since June earlier this week.

"I am hesitant to read too much into the bond moves while this healthcare reform measure is hanging over the market," said Lenk.

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(Editing by Larry King)