Euro zone yields edge up as investors try to sync with ECB pace

LONDON: Euro zone government bond yields edged higher on Monday, with the European Central Bank expected to slow down its asset purchases after a strong start to its trillion euro programme last week.

After buying just short of 10 billion euros worth in the first days of the programme, ECB data showed on Monday, it was well on track to reaching its target of buying 60 billion euros of mostly government debt a month.

That led to expectations of a slowdown, although whether it would come this week or later was still uncertain. Either way, investors trying to trade off any ECB moves were easing the pace as well, traders said.

"In the first three days of last week they were very active and then from what we've heard (ECB activity) diminished quite a lot," said Piet Lammens, a strategist at KBC. "There has been a lot of scepticism about the ability of the ECB to buy in the market ... so probably they wanted to show that they have enough sellers out there.

Maybe now they say 'we have made our point and we would go more softly in the next few weeks' or they will continue to show their power." German 10-year Bund yields rose 3 basis points to 0.28 percent, having hit a record low of 0.188 percent last week. All other euro zone bond yields were a tad higher, edging away from record lows.

Analysts said expectations that the Federal Reserve would drop the word "patient" from its statement on the interest rate outlook later this week was also pushing yields higher. That change of language would signal increased chances the Fed would hike interest rates later this year.

The rapid depreciation of the euro currency is also noticed by the bond market, with some questioning whether they should upgrade their inflation and growth forecasts - and implicitly become less optimistic on the bond market - because of it.

"There's no denying that the macro data are improving," ING senior rate strategist Martin van Vliet, who sees yields edging up later this year.

He expected the spread between two- and 10-year German yields would not narrow more than it did in Switzerland - around 40 bps - which would imply that the floor for Bund yields should be around 0.15 percent.

Citi strategists expect 10-year Bund yields to go negative. "German paper should roll progressively towards -20 basis points," they said, referring to the floor the ECB has set itself for purchases -- its current deposit rate.