(Adds quotes, updates prices)
By Abhinav Ramnarayan
LONDON Dec 14 Euro zone bond yields fell on
Wednesday ahead of a U.S. Federal Reserve meeting investors
expect will deliver the first rate hike in 12 months and at the
same time it flags its stance for 2017.
Whereas a hike in rates would normally push yields higher,
on this occasion it is fully priced in and the market is
focusing on what direction Fed Chair Janet Yellen will take.
"We do not rule out the possibility that the FOMC tightens
with a dovish twist and downgrades the assessment of the policy
stance in the FOMC statement," ING strategist Martin van Vliet
said, adding that markets are already almost fully pricing a
further two rate hikes next year.
The yield on Germany's 30-year bonds led the
falls, dropping 6.6 basis points to 1.08 percent by 1126 GMT.
German 10-year yields fell 4.3 bps to 0.31
Dutch, French and Austrian 30-year yields were down 6-7 bps.
"If you look at how the long-end (of the government bond
curve) is trading, the focus is no longer on this rate hike but
on what message the Fed sends for 2017," said Mizuho strategist
Yields fell in other parts of the curve as well, extending
Tuesday's move. ING strategists say the rally over the last two
sessions is partly a delayed reaction to the European Central
Bank's extension of its bond-buying scheme, announced last week.
Though the ECB said it would buy 60 billion euros of assets
a month from April 2017 onwards, compared with 80 billion euros
currently, it extended the programme to the end of 2017. Market
expectations were for a six-month extension to September 2017.
The ECB also changed the lower yield and maturity limits on
purchases. On Wednesday, Germany's two-year bond yields were a
whisker from record lows, down 1.6 bps at minus 0.765 percent
Italian government bond yields held around one-month lows
after interim Prime Minister Paolo Gentiloni won an initial vote
of confidence in the lower house of parliament overnight,
although he is expected to face a sterner test in the upper
The yield on Italy's 10-year government bond
dropped 6.7 bps lower to 1.81 percent, well off Monday's high of
Monte dei Paschi could reopen a debt-to-equity
swap offer on Thursday if its board on Wednesday opts to push
ahead with a do-or-die attempt to raise 5 billion euros ($5.3
billion) this year, two sources familiar with the matter told
For Reuters new Live Markets blog on European and UK stock
markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets
(Editing by Jeremy Gaunt)