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Euro zone bond yields at six-week highs as markets mulls ECB's impact

Credit: REUTERS/KAI PFAFFENBACH

Euro zone bond yields rose to six-week highs on Friday as concern crept into the market that the European Central Bank is reaching the limits of what its policy can achieve, a day after the bank pledged indefinite stimulus to boost a weak economy.

By Dhara Ranasinghe

LONDON, Sept 13 (Reuters) - Euro zone bond yields rose to six-week highs on Friday as concern crept into the market that the European Central Bank is reaching the limits of what its policy can achieve, a day after the bank pledged indefinite stimulus to boost a weak economy.

Reports that U.S. President Donald Trump does not rule out an interim trade pact with China lifted world stock markets and fuelled selling in safe-haven bonds as the week drew to a close.

The fallout of Thursday's ECB policy stimulus remained the focus for bond investors. They had initially cheered the ECB's rate cuts, open-ended asset purchases and steps to protect banks for the negative side-effects of sub-zero interest rates.

But concern was growing over the emphasis at ECB chief Mario Draghi's press conference on the need for fiscal stimulus to take over in boosting economic growth and inflation.

"Markets are realising that the ECB is nearing its limits, and the way that Draghi insisted that fiscal policy needs to step up to the plate underscores this notion," said Commerzbank rates strategist Christoph Rieger.

German, French and Dutch 10-year bond yields all rose to six-week highs.

Germany's 10-year bond yield rose as high as -0.48% DE10YT=RR and was set for its biggest weekly jump since early 2018. Thirty-year bond yields were back in positive territory, trading 4.5 bps higher on the day at 0.03% DE30YT=RR.

Italy's 10-year bond yield, which fell to a record low of 0.758% IT10YT=RR on Thursday, was 6 bps higher at 0.91%.

"The numerous mentions of fiscal policy during the press conference left us with the sense that the monetary policy setters in the euro zone are a little doubtful on their ability to raise inflation without fiscal help," said Peter Chatwell, head of rate strategy at Mizuho.

Analysts said the ECB's plan to resume quantitative easing and offer more generous terms on its cheap multi-year loans to banks was still good for peripheral bond markets. They expected spreads between German and peripheral bonds to keep tightening.

In contrast, short-dated bonds, especially Germany's, have also come under pressure after the ECB announced tiered interest rates on Thursday.

Euro zone banks will be exempted from paying the ECB a penalty charge on idle cash worth six times their mandatory reserves.

Analysts said the decision pointed to reduced demand for short-dated bonds from banks, given the much more favourable terms than expected under tiering.

"From a bank's perspective, if there is more money you can put at the ECB for 0%, there is less need for buying short-dated Bunds at -0.70%," said DZ Bank rates strategist Daniel Lenz.

Germany's 10-year bond yieldhttps://tmsnrt.rs/2ZS5oMF

(Reporting by Dhara Ranasinghe, editing by Lary King)

((Dhara.Ranasinghe@thomsonreuters.com; +442075422684;))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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