* Most euro zone bond yields creep up ahead of ECB meeting
* ECB rate decision at 1145 GMT, Draghi at 1230 GMT
* Focus on potential tweaks to bond-buying scheme, extension
* Irish bond yields fall to 3-week low after auction
(Updates price action, Irish auction results)
By Dhara Ranasinghe
LONDON, Sept 8 Most euro zone bond yields crept
up on Thursday, as a sense of caution moved in ahead of a
European Central Bank meeting later in the day.
Irish bonds outperformed their peers, with yields falling to
their lowest level in more than three weeks after
a successful 1 billion euro sale of 10-year Irish
Still, the spotlight remained firmly on the ECB, which is
expected to leave rates unchanged on Thursday and point to
further stimulus down the road to boost anaemic inflation and
growth in the euro area.
It has already exhausted much of its firepower, so ECB
President Mario Draghi has to pick his time and probably has
enough arguments to wait a bit longer.
Judging by a fall in bond yields this week, some investors
are not ruling out action at Thursday's meeting.
Germany's 10-year Bund yield, which was
marginally higher at minus 0.11 percent, has fallen about 8
basis points this week. Thirty-year bond yields rose 4 bps to
0.45 bps, unwinding some of this week's falls.
A key market measure of long-term inflation expectations in
the euro zone -- the five-year, five-year breakeven forward rate
- meanwhile rose to almost 1.32 percent, up from two-month lows
hit earlier this week below 1.26 percent.
That's another sign, say analysts, of market speculation
about possible stimulus that would eventually boost inflation.
They said market expectations are centred around whether the
ECB's 1.7 trillion asset-purchase programme will be extended and
possible tweaks made to the scheme to increase the pool of
"A lot of attention is focused on the buying of sovereign
bonds and the challenges facing the ECB," said Rabbani Wahhab,
senior fixed income portfolio manager at London and Capital.
"That's the key focus from our perspective on fixed income."
The ECB faces a shortage of eligible bonds for its
asset-purchase programme, with more than 50 percent of the
German bonds on the ECB's shopping list estimated to be
ineligible for the scheme because they yield less than the
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.
There has also been talk in recent months that the ECB could
consider more 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.
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There was also some focus on Greece, which may sell one or
two small bonds after it is included in the ECB's quantitative
easing scheme, according to senior officials with knowledge of
"We would be more motivated to own Greece on the back of its
inclusion in an ECB QE programme," said Louis Gargour, CIO at
LNG Capital, a London-based hedge fund.
"Once Greece is part of QE bond yields are unlikely to be
above 8 percent for much longer," he said, adding that the fund
is and has been invested in Greek assets.
Greece's 10-year bond yield was steady at 8.44 percent
(Reporting by Dhara Ranasinghe; editing by)