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UPDATE 1-BOJ exit talk jolts bond markets, sets stage for ECB
June 8, 2017 / 11:04 AM / 6 months ago

UPDATE 1-BOJ exit talk jolts bond markets, sets stage for ECB

* Yields push away from multi-week lows

* ECB may change outlook, tweak guidance

* BOJ policymaker talks stimulus withdrawal

* Italian bonds buck trend on bank rescue plan (Updates prices)

By John Geddie

LONDON, June 8 (Reuters) - Euro zone government bonds lost some of their allure on Thursday as talk of the Bank of Japan’s eventual withdrawal of extraordinary monetary stimulus set the stage for similar signals from the European Central Bank.

Yields - which move inversely to prices - nudged off multi-week lows as a meeting of the bloc’s monetary guardians shifted the focus away from geopolitical events that have seen investors stock up on safe-haven bonds in recent days.

While cautious tightening from the ECB had long been earmarked in investors’ diaries, a discussion by a BOJ policymaker about future plans to scale back its bond-buying scheme took some by surprise as Japan is still toiling with stubbornly low inflation.

“The reason we are a bit under pressure today is because from a number of angles being long (bonds) doesn’t look that compelling anymore,” RBC’s global macro strategist Peter Schaffrik said. “Whether that extends into a more prolonged sell-off, we’ll have to see.”

German 10-year government bond yields, the bloc’s benchmark, edged up 3 basis points to 0.28 percent, moving away from a six-week low of 0.245 percent hit Wednesday.

Most other euro zone equivalents were 1-3 bps higher on the day. Earlier, short-dated Japanese bond yields hit their highest level since February.

While the ECB is widely expected to keep policy unchanged on Thursday, including its 2.3 trillion euro ($2.59 trillion) bond-buying programme and sub-zero interest rates, sources told Reuters it will acknowledge the improved economic outlook by removing a reference to “downside risks” in its statement.

RBC also expects subtle changes to its forward guidance to remove a reference to possible further cuts to interest rates.

But any announcement on its quantitative easing (QE) programme is likely to be put off until the autumn, when policymakers hope the economic picture will have become clearer.

Aside from the focus on monetary policy, analysts said there was broad relief across financial markets after former FBI director James Comey’s testimony on the bureau’s investigation into Russia’s alleged interference in the 2016 U.S. presidential election revealed little in the way of new details.

Investors have viewed this saga as a distraction for President Donald Trump, on whom they are pinning hopes to reflate the world’s biggest economy with ambitious spending plans.

U.S. 10-year bond yields rose 2 bps on Thursday to a six-day high of 2.2 percent

Italian government bonds bucked the broader trend, finding demand after a report that Italian banks are considering assisting in a rescue of troubled lenders Popolare di Vicenza and Veneto Banca.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=

Reporting by John Geddie; Editing by Tom Heneghan

Our Standards:The Thomson Reuters Trust Principles.
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