* ECB meets Thursday, not expected to deliver more stimulus
* Pressure to address bond scarcity eases as yields edge up
* But tweaks to bond-buying scheme, QE extend not ruled out
* Euro zone yields 2-3 bps lower on Monday
(Updates prices, adds details on Ireland bonds)
By Dhara Ranasinghe
LONDON, Sept 5 A slight rise in euro zone bond
yields in recent weeks has eased immediate pressure on the
European Central Bank to address a scarcity of bonds for its
monetary stimulus programme when it meets this week, though a
pre-emptive move is not ruled out.
Having fallen quickly and sharply in the wake of June's
Brexit vote, yields across the euro area have crept back up.
German Bund yields are 15 basis points above record lows hit in
July and French, Dutch and Finnish yields are 7-9
bps above record lows .
The small back-up in yields has created some space for the
ECB, which faces a scarcity of eligible bonds for its 1.7
trillion euro asset-purchase programme to boost inflation and
growth. More bonds are now offering a yield above the bank's
While the ECB is expected to leave monetary policy unchanged
when it meets on Thursday, the central bank could use the
opportunity to extend its bond-buying scheme and tweak the
parameters of its programme to ease its scarcity issues.
"There's a decent probability of tweaks being made. The only
problem I have with this assessment is that ECB officials in
recent weeks have denied that there are scarcity issues," said
ING senior rates strategist Martin van Vliet.
"But if you believe that they will extend the programme then
it makes sense for them to address bond scarcity."
About 57 percent of the German bonds on the ECB's shopping
list are ineligible for its asset-purchase programme because
they yield less than the deposit rate, according to Swiss wealth
manager Pictet. That's not much changed from levels at the time
of the ECB's last meeting in July.
Germany is the region's benchmark issuer and the bulk of
purchases for the bond-buying programme are made there.
According to Nordea, the ECB could run out of eligible bonds
in the euro zone to buy around the turn of the year unless it
eases its own restrictions.
"Even for Finland, at this level of yields, the (ECB) can
probably still buy for another 5-6 months. Another fall in
yields however could reduce that horizon, hence the ECB may want
to be pre-emptive," Societe Generale said in a note.
Most bond yields across the euro area were flat to 3 basis
points lower on Monday as Friday's weaker-than-expected U.S.
jobs data prompted investors to scale back expectations for a
near-term rise in U.S. interest rates.
The yield on Ireland's 10-year bond dropped even more, by
5.5 bps to 0.43 percent after ratings agency DBRS
maintained the country's rating at A (High) with a stable
Options open to the ECB include dropping the rule on not
buying debt yielding less than the deposit rate, which is at
minus 0.40 percent. It could also scrap a rule barring it from
buying more than 33 percent of any bond, so long as it does not
have a Collective Action Clause.
Radical steps such as a change to the capital key, the
system whereby the ECB buys bonds in euro zone countries in
proportion to the size of their economies, are not expected for
Still, ECB chief Mario Draghi could use his news conference
on Thursday to hint at further monetary easing down the road.
Inflation remains low and long-term market inflation
expectations, measured by five-year, five-year breakeven rates,
are at 1.27 percent.
That's not far off record lows of around 1.25 percent hit in
July and well below the ECB's inflation target of close to 2
"We're a trillion euros into the asset purchase programme
and inflation is still low, so something has to give," said
Rabobank strategist Matthew Cairns.
(Reporting by Dhara Ranasinghe; Editing by Gareth Jones)