The headquarters of the European Central Bank (ECB) are photographed in front of the skyline with its banking towers in Frankfurt
The headquarters of the European Central Bank (ECB) are photographed in front of the skyline with its banking towers in Frankfurt, Germany, November 22, 2017. REUTERS/Kai Pfaffenbach

November 24, 2017

By Abhinav Ramnarayan

LONDON (Reuters) – Euro zone government bond yields rose further off recent lows on Friday after a detailed account of the European Central Bank’s October meeting showed that ratesetters were divided on when exactly it should end bond purchases.

Most euro zone government bonds – especially the lower-rated ones – have rallied strongly since late October when the ECB extended asset purchases until September 2018 and left it open-ended beyond that.

But minutes of the meeting released on Thursday showed that while ratesetters broadly agreed on extending the scheme, many wanted a clean end to it next year.

Some policymakers believe the ECB should stop linking extraordinary stimulus to inflation, which would allow it to end purchases even if consumer prices continue to lag economic growth.

“For the central bank, this could be one point for an exit, if they link just the traditional toolkit to inflation dynamics, they could exit quantitative easing sooner rather than later,” DZ Bank analyst Sebastian Fellechner said.

The yield on Germany’s 10-year government bond <DE10YT=TWEB>, the benchmark for the region, is 2 basis points higher than the week’s low at 0.36 percent.

Lower-rated Southern European countries, seen as the biggest beneficiaries of ECB largesse, underperformed, rising 2-4 bps.

The gap between Italian and German 10-year borrowing costs, for example, was 145 bps, 5 bps wider than the same time on Thursday and 9 bps off the tightest levels this month. <IT10YT=TWEB> <DE10YT=TWEB>

Also in Germany, the leader of the country’s Social Democrats came under growing pressure to drop his opposition to a new “grand coalition” with Angela Merkel’s conservatives, adding to upward pressure on high-grade yields.

The possibility of fresh elections had added some uncertainty in the market, so any possibility of avoiding that reduces the “safe haven” bid for the better-rated euro zone government bonds.

In addition, German business confidence rose unexpectedly in November to hit an all-time high, a survey showed Friday, adding to signs that Europe’s largest economy was heading for a strong fourth quarter.

However, as the possibility of one election fades, the likelihood of another has increased sharply. Ireland’s government was on the verge of collapse on Thursday after the deputy prime minister’s position was called into question.

Irish government bonds were among the worst performers on Friday, with 10-year yields rising 3.5 bps to 0.61 percent. <IE10YT=TWEB>

(Reporting by Abhinav Ramnarayan; Editing by Mark Heinrich)

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