October 13, 2016 / 7:46 AM / 10 months ago

UPDATE 3-Central bank signals knock German bond yields off one-month peak

(Updates prices)

By John Geddie

LONDON, Oct 13 (Reuters) - Europe's benchmark government bond yield fell back from one-month highs on Thursday after the latest signals from the world's central banks soothed fears that monetary stimulus could be petering out.

Talk that the ECB might reduce or 'taper' the scale of its asset purchases before the scheme finally ends has particularly unnerved investors in recent days.

But Reuters reported late on Wednesday, quoting sources familiar with the discussions, that the central bank may discuss at its meeting next week technical changes that would allow it to extend the scheme beyond its scheduled end in March.

The report came alongside minutes suggesting the U.S. Federal Reserve is likely to take a gradual approach to further rate increases and another Reuters story that the Bank of Japan will probably cut its inflation forecasts next month.

Data showing the world's second-biggest economy, China, is faltering further underlined for investors the need for central banks not to take their foot off the gas.

"It is a combination of a cautious Fed and the ECB discussing some hands-on ways to address its QE programme," Commerzbank strategist Rainer Guntermann said.

"The market clearly got a bit ahead of itself in terms of tapering jitters."

German 10-year yields -- the euro zone's benchmark -- fell 3.6 basis points to 0.03 percent, pulling back from a one-month high hit on Wednesday, according to Tradeweb.

Most other euro zone yields were down 3-4 bps on the day.

Sources told Reuters that the ECB could discuss at its meeting next Thursday proposals to relax a rule forcing the ECB to buy debt in proportion to the size of each euro zone economy.

Other proposals may include buying a limited amount of bonds yielding less than the deposit rate, which the ECB currently rules out, and buying a bigger share of any individual bond issue, the sources added.

But any decision could be deferred until December when the bank will also decide whether to extend the scheme beyond March.

Minutes from the U.S. Federal Reserve's September meeting suggested a December rate hike is likely but that almost all policymakers agree that the rate path will be much shallower than the Fed's last tightening cycle.

The minutes' release late on Wednesday pushed U.S. Treasury yields lower.

The Bank of Japan is meanwhile likely to cut its inflation forecasts for the next fiscal year in a quarterly review concluding on Nov. 1, sources told Reuters. It is not expected to ease in the near term though, after having revamped its policy framework only last month.

On the data front, China's September exports fell 10 percent from a year earlier, far worse than expected, while imports unexpectedly shrank, suggesting signs of steadying in its economy may be short-lived.

At auction on Thursday, Ireland sold 1 billion euros of 10-year bonds and Italy raised 8.5 billion euros ($9.5 billion) over three bonds. (Editing by Catherine Evans)

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