×

UPDATE 1-Euro zone bond yields rise on U.S tax optimism, Spain outperforms

* U.S. likely to pass tax overhaul this week

* Most euro zone bond yields up 1-2 bps

* Slight outperformance of Spain ahead of Catalonia vote

* Euro zone inflation expectations at 10-month high

* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr (Rewrites throughout)

LONDON, Dec 19 (Reuters) - Euro zone bond yields edged up on Tuesday on expectations that a sweeping U.S tax overhaul would be passed this week, while there was a slight outperformance of Spanish debt as markets shrugged off secession risks in Catalonia's upcoming regional election.

The Republican-controlled Congress appeared all but certain to pass a tax cut bill after two Senate Republican holdouts agreed on Monday to support the overhaul backed by President Donald Trump.

"It would be a major surprise if that didn't happen, although there are as ever still a few uncertainties as the House and then Senate vote on the reconciled bill," said David Page, senior economist at AXA Investment Managers on the Reuters Global Market Forum.

The House of Representatives, which is expected to adopt the tax bill, was due to vote first at around 1830 GMT on Tuesday, Republican aides said on Monday. The Senate vote is expected to follow either later on Tuesday or on Wednesday.

Most 10-year euro zone bond yields were up 1-3 basis points on the day. Spanish bond yields, however, edged down two days before a Catalan regional election that polls suggest will produce a hung parliament.

Spain's 10-year bond yield was steady at 1.44 percent , with the gap over top-rated German peers around 3 bps tighter on the day at 109 bps.

"Markets are quite relaxed about the outcome," said Rabobank rates strategist Lyn Graham-Taylor. "Even if we get a pro-independence majority, it's unlikely that anything is going to happen to the unity of the Spanish state."

From jail, the leader Catalonia's main pro-independence party told Reuters on Monday he would back away from demands for unilateral secession from Spain.

A key market gauge of long-term inflation expectations in the euro area meanwhile rose to a 10-month high.

The five-year, five-year breakeven inflation forward, tracked by the European Central Bank, rose above 1.74 percent , its highest level since late February.

European Central Bank rate setter Ardo Hansson said on Tuesday that the ECB should consider changing its policy message, which includes a pledge to buy bonds until inflation recovers, as the outlook for inflation is improving.

Elsewhere, Germany announced plans to borrow more money on capital markets in 2018 than this year because it will have to pay back more old debt than it repaid in 2017.

Germany's 10-year bond yield was up 2 bps higher at around 0.33 percent, above three-month lows hit last week at 0.29 percent. The 30-year Bund yield was up 3 bps higher, at 1.09 percent on the day.

(Reporting by Fanny Potkin; editing by John Stonestreet and Richard Balmforth)