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UPDATE 1-Euro, govt bond yields lifted by hints of ECB policy shift
April 25, 2017 / 4:02 PM / 8 months ago

UPDATE 1-Euro, govt bond yields lifted by hints of ECB policy shift

* Euro zone yields spike as focus shifts from politics to policy

* Euro firms on Reuters reports of ECB tweak in June

* ECB meets Thursday but no changes expected (Writes through)

By John Geddie and Patrick Graham

LONDON, April 25 (Reuters) - Euro zone government bond yields rose broadly and the euro firmed on Tuesday after Reuters reported that European Central Bank policymakers see scope for sending a small signal in June towards reducing monetary stimulus.

Three sources on and close to the bank’s Governing Council told Reuters that with the threat of a run-off between two eurosceptic candidates in France averted, and with the economy on its best run in years, there may be tweaks to the ECB’s opening statement in June.

Benchmark German government 10-year bond yields hit the day’s high of 0.39 percent following the story, up nearly 6 basis points on the day. Most other euro zone yields also surged, closing up 5 to 9 bps on the day.

The euro rose as high as $1.0939, breezing past previous resistance at $1.0912.

“Obviously with the political risk moving out of the way for France, ECB policy is starting to come more into focus so this report was well timed in that respect,” said MUFG strategist Lee Hardman.

There had been some concern at the ECB and in other European Union circles that France might face a choice between two anti-euro candidates for president, one from the left and open from the right.

The emergence of centrist Emmanuel Macron as favourite to win the second and final round of the election in May has eased those concerns, however.

French government bond yields, which fell sharply on Monday and on Tuesday morning, closed up 6 basis points at 0.82 percent.

The gap to German equivalents, which earlier hit its lowest since November at around 40 bps, closed at 45 bps.

The ECB meets on Thursday but sources told Reuters there was little appetite to change the pledge to buy bonds at least until the end of the year and to keep rates at rock bottom until well after that.

“The ECB will probably conclude that it is too early to announce plans to further reduce its asset-purchase programme,” said Franck Dixmier, global head of fixed income at Allianz Global Investors.

“Particularly given that making any public statement about tapering would cause financing conditions to tighten by driving rates higher, which would make issuing such a statement counterproductive to the central bank’s goals.”

Money markets are pricing in around a 50 percent chance of an interest rate rise early next year, with expectations rising after the result of Sunday’s vote in France. (Additional reporting by Abhinav Ramnarayan Editing by Jeremy Gaunt)

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