* German 2,5-year yields hit 1-1/2 week highs
* ECB report, ECB comments, easing geopolitical worries
* ECB's Coeure: Prospects for economy have improved
By Dhara Ranasinghe and Abhinav Ramnarayan
LONDON, April 19 Shorter-dated German government
bond yields shot higher on Wednesday following an ECB report on
market financing conditions and comments from central bank
Analysts also cited a recovery in risk sentiment, reflected
by firmer stocks, and an easing of geopolitical concerns as
factors behind the rise in two- and five-year German yields to
1-1/2 week highs.
Two-year bond yields jumped almost 6 basis points to minus
0.79 percent and were set for their biggest one-day
rise since the start of March.
In a survey of banks released on Wednesday, the European
Central Bank said the liquidity and functioning of markets for
underlying collateral, especially in government bonds, has
The scarcity of high-quality short-term debt, which is used
as collateral in funding markets, has helped drive yields on the
Commerzbank strategist David Schnautz said the bank survey
could encourage the ECB to take action to address a shortage of
bonds for use as collateral.
"So far the ECB's mantra has been that markets are
functioning normally, so it seems to be softening its stance by
acknowledging the knock-on effects of QE to the proper
functioning of the market," Schnautz said.
Shorter-dated bonds led selling across the German curve,
with five-year bond yields up 5 bps at a 1-1/2 week high of
minus 0.47 percent.
ECB WEIGHS IN
Comments from a string of ECB policymakers added to selling
pressure in bond markets, analysts said.
Prospects for the euro zone economy have improved and the
risk of a new downturn is no longer prevalent, ECB director
Benoit Coeure said, expressing a more benign view than ECB chief
Earlier, ECB governing council member and Estonian central
bank chief Ardo Hansson said the central bank still needs more
hard economic data before considering any specific change in
"Maybe the market has decided this is the start of a
tapering discussion and most recently it's been (German) Bunds
that have been profiting from QE, especially the short end,"
said DZ Bank strategist Christian Lenk.
He said a somewhat underwhelming auction of long-dated
German bonds may have also weighed on the German curve.
Germany, the euro zone's benchmark issuer, sold 814 million
euros in a top-up of its bonds maturing in 2044, generating
demand of 1.012 billion euros for the sale.
Stability in opinion polls ahead of a first round of voting
in French presidential elections on Sunday helped push the
France/Germany 10-year government bond yield spread below 70
basis points for the first time in over a week.
France's 10-year bond yield briefly fell to 0.86 percent
, its lowest level in almost three months.
"The market is calming down a little because of stability in
the polls with (Emmanuel) Macron continuing to be in the lead. I
think it still looks quite likely we will see a head-to-head
between (Marine) Le Pen and Macron in the second round," said
The gap between French and German borrowing costs had
widened in recent weeks on concerns that far-right leader Le Pen
might take power and try to lead France out of the euro.
The latest poll shows Macron winning the first round on
April 23 and beating Le Pen in the run-off vote on May 7.
South European bond yields, which tend to be sensitive to
concerns over the future of the euro zone, fell. Portuguese
yields hit a three-week low of 3.78 percent.
(Editing by Mark Trevelyan)