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Euro zone bond yields edge higher as fears of "hard Brexit" recede
October 12, 2016 / 8:31 AM / a year ago

Euro zone bond yields edge higher as fears of "hard Brexit" recede

LONDON, Oct 12 (Reuters) - Euro zone bond yields edged higher on Wednesday after concerns over a “hard Brexit” receded on reports that Britain’s parliament will play a larger role in exit negotiations.

Sterling rose sharply on Tuesday and on Wednesday morning on the back of news that British Prime Minister Theresa May has offered to give British lawmakers some scrutiny of the process to leave the European Union.

This led to a more optimistic tone in European markets which has pushed yields higher, led by Germany’s 10-year Bund , which rose 1.2 basis points to 0.05 percent in early trades.

“It amounts to a reduction of the risk of a ‘hard Brexit’ where the UK would leave the single market, so it is moving prices today,” said Antoine Bouvet, a rates strategist at Mizuho.

He warned, however, that the effect may not last.

“I don’t think markets will get too carried away, because while it sounds like the UK parliament will be involved in discussions, it’s still not clear to what extent this will affect the process,” he said.

Worries over central bank action has pushed bund yields close to one-month highs in recent times, and that is likely to come back into focus as the session wears on, analysts said.

Talk that the European Central Bank might reduce the scale of its asset purchases before the programme finally ends has unnerved investors in recent days and saw 10-year Bund yields hit a high of 0.068 percent on Tuesday. This compares to the low of minus 0.16 percent hit at the end of September.

Prospects of an ECB taper have risen up the agenda and some analysts are now expecting the central bank to signal an easing off.

Rabobank analysts have updated their ECB monetary policy expectations. They expect the central bank to extend the current programme - set to end in March 2017 - by six months, but expect tapering to begin in September 2017.

“It is too early for the ECB to pull the plug on its asset purchases,” Rabobank strategist Elwin de Groot said.

“However, we do also see increased concerns in the Council about the need for a well-coordinated exit strategy ... we believe that the ECB will aim to manage expectations of an exit in the somewhat longer term,” he said.

The market will be looking for further hints on this later with ECB board members Benoit Coeure and Yves Mersch both due to give speeches.

U.S. Federal Reserve officials William Dudley and Esther George are also due to speak ahead of the release of the minutes of the Fed’s September meeting, and markets will be looking out for clues on when the next rate hike will be.

For Reuters new Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url= (Reporting by Abhinav Ramnarayan; Editing by Alison Williams)

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