(Writes through, adds quotes, updates prices)
By Abhinav Ramnarayan
LONDON Dec 8 Long-dated euro zone bond yields
sold off on Thursday after the European Central Bank extended
its asset purchase programme but at a reduced level and
introduced measures allowing it to buy more short-dated bonds.
The central bank said its scheme would be extended to the
end of 2017 from the original end date of March 31 but said it
would trim its monthly purchases to 60 billion euros a month
from 80 billion from April.
Many in markets had expected a six-month extension but at 80
billion euros a month.
"This announcement is what the market had feared the most,
and it became a reality," said Commerzbank strategist David
Schnautz. "Though they have announced a longer QE than expected
the key point is we go down from 80 billion euros (a month) to
The ECB widened the maturity range for purchases and said it
would buy bonds with yields below the minus 0.4 percent deposit
"It's good for the short end but at the expense of the long
end," said Schnautz.
Germany's 30-year bond yield rose 13 basis
points to 1.145 percent, its highest level since January, while
two-year yields fell 6 bps to minus 0.74 percent,
pushing the gap between the two to 187 bps, its highest in over
German 10-year yields, the benchmark for the region, rose 3
bps to 0.38 percent.
Portugal's 10-year borrowing costs shot up 25 bps to 3.80
percent. The ECB is close to its self-imposed
limits on how many Portuguese bonds it can buy.
"It was a clever move to extend by nine months," said Martin
van Vliet, senior rates strategist at ING. "By showing that the
60 billion euros will be maintained for nine months, (ECB
President Mario) Draghi makes it harder for markets to
extrapolate about the end of QE in the first half of 2018."
Draghi told a news conference tapering was not even
discussed by the ECB's policymakers.
"Even in its announcement of the reduction in asset
purchases, it was made clear that the ECB could increase the
pace of purchases if needed: a sensible hedge against political
risk, tightening in financial conditions and other negative
shocks," Fidelity economist Anna Stupnytska said.
The euro initially hit a four-week high of $1.0875 as
markets reacted to news of the scaling back of asset purchases.
But it quickly turned around and by 1630 GMT was almost 3 cents
below that high, down 1.3 percent on the day close to $1.06.
(Additional reporting by Jemima Kelly, editing by Nigel
Stephenson and Hugh Lawson)