* German 10-year yields highest since June
* Thursday's ECB meeting in focus
* Market seeks clarity on potential tweaks to ECB
* Scope for "tapering" also in focus
(Updates prices for close)
By Dhara Ranasinghe
LONDON, Oct 17 German 10-year bond yields topped
0.1 percent on Monday for the first time since the results of
the Brexit referendum in June, pushed higher by rising U.S. and
British yields as investors turned their focus to this week's
European Central Bank meeting.
The ECB may discuss technical changes that would allow it to
extend its 1.7 trillion-euro ($1.90 trillion) of asset purchases
beyond the March 2017 end-date, at a time when talk of a
potential "taper" of its scheme has put markets on edge.
Bond yields have risen since the ECB last met in September,
with more now falling within the bank's eligibility criteria.
That creates some space for the ECB, which faces a scarcity of
bonds eligible for quantitative easing.
Germany's 10-year bond yield, for instance, is up 21 basis
points this month, moving out of negative territory to top 0.1
percent on Monday, its highest since the results
of Britain's referendum on European Union membership on June 24.
Even the yield on its six-year government bond
briefly nudged above minus 0.40 percent -- the cut-off for ECB
purchases -- for the first time since June.
A suggestion by Federal Reserve Chair Janet Yellen on Friday
that the central bank may allow inflation to exceed its 2
percent target pushed U.S. bond yields to four-month highs.
Meanwhile, a recent plunge in the pound has sparked
inflation worries that drove 10-year Gilt yields to their
highest level since the Brexit vote.
Commerzbank estimates that the ECB will run out of eligible
German sovereign and agency paper to buy by next summer, pushing
back that deadline from last month when yields were lower.
Analysts expect the ECB to keep policy unchanged this week
and wait until December to announce a possible extension and
tweaks to the programme.
Still, the ECB's news conference with President Mario Draghi
will be scrutinized 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 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 above 1 percent and
then it will start to prepare markets for tapering," said Shweta
Singh, a senior economist at Lombard Street Research.
Data on Monday confirmed euro zone inflation in September at
0.4 percent, well below the ECB's target of just under 2
percent. It is expected to rise in coming months on higher oil
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 1.42
percent -- its highest level since June.
But euro zone bond markets are not expected to witness a
"taper tantrum" on the same scale as that in U.S. bond markets
after former Federal Reserve Chairmen Ben Bernanke suggested in
2013 that U.S. quantitative easing 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
(Editing by Catherine Evans)