* Bund yields touch highest since June, track US, UK yields
* Thursday's ECB meeting in focus
* Market seeks clarity on potential tweaks to ECB
* Scope for "tapering" also in focus
By Dhara Ranasinghe
LONDON, Oct 17 German bond yields rose to their
highest level in almost four months on Monday, facing upward
pressure from a rise in U.S. and British bond yields as focus
turned to an ECB meeting that could shed more light on the
central bank's bond buying programme.
A report last week that the European Central Bank may
discuss technical changes at this week's meeting that would
allow it to extend the 1.7 trillion euro asset purchase beyond
the March 2017 end-date had bought some relief to markets
unnerved this month by talk of a "taper."
Bond yields across the region have risen since the ECB last
met in early September, with more offering a yield above the
bank's eligibility threshold. That creates some space for the
central bank, which faces a scarcity of eligible bonds for
Germany's benchmark 10-year bond yield has risen 20 basis
points this month, moving out of negative territory.
It rose more than 3 basis points to 0.095 percent
on Monday, its highest level since June as U.S.
bond yields rose following a suggestion by Federal Reserve Chair
Janet Yellen that the central bank may allow inflation to exceed
its 2 percent target.
A further rise in British gilt yields helped push euro zone
yields 3-4 bps higher on the day.
Commerzbank estimates that the ECB will run out of eligible
German sovereign and agency paper to buy by next summer, about
three months later than last month when yields were lower.
Analysts expect the ECB to keep policy unchanged this week
and wait until December to unveil a possible extension and
tweaks to the programme.
Still, the ECB's news conference with President Mario Draghi
will be scrutinized closely as investors assess both the scope
for further easing and eventual tapering.
"Rhetoric will be very important this week," said Martin Van
Vliet, senior rates strategist at ING. "Draghi will try to play
down the taper talk and may give some hints on what to expect in
Most economists do not expect the ECB to start scaling back
its massive monetary stimulus soon, but note that a report this
month that the ECB might reduce or 'taper' the scale of its
purchases before the scheme finally ends has struck a chord.
Market pricing suggests a 10 bps rate cut is priced in by
the end of 2017.
Against this backdrop economic data could start to play a
more important role in shaping market expectations for what the
ECB will do next.
"We think the ECB will declare victory once it becomes more
and more certain that inflation is moving about 1 percent and
then it will start to prepare markets for tapering," said Shweta
Singh, a senior economist at Lombard Street Research.
Euro zone inflation at 0.4 percent is well below the ECB's
target of close to 2 percent. It is expected to rise in the
months ahead, pulled higher by oil prices.
A key market gauge of long-term inflation expectations, has
started to move higher. The five-year, five-year breakeven
forward, which measures where the market expects
2026 inflation forecasts to be in 2021, is trading around 1.41
percent -- its highest level since June.
Still, euro zone bond markets are not expected to witness a
"taper tantrum" on the same scale as U.S. bond markets
experienced in 2013 when former Federal Reserve Chairmen Ben
Bernanke first suggested that quantitative easing in the U.S.
would be slowly wound down.
The experience of that sell-off, which saw U.S. Treasury
yields jump just over 100 bps between May 2013 and early 2014,
could weigh on the ECB's mind.
UBS estimates that long-dated yields on core euro zone
government bonds will rise by around 70 bps by the time QE is
"With tapering likely to start next year, you will continue
to see bond buying throughout 2017," said Mark Dowding, co-head
of investment grade, BlueBay Asset Management. "In this
environment, German Bunds are going to remain scarce and that
will limit how high yields can rise in a material fashion."
(Reporting by Dhara Ranasinghe)