LONDON: Euro zone bond yields edged higher in a jittery start to Thursday trade, as markets sought direction from the European Central Bank on the future of monetary policy when it meets later in the day.
The expectation is that ECB President Mario Draghi will reconfirm his commitment to stimulus measures, and possibly drop hints on potential changes to the terms of the central bank's asset-purchase programme to alleviate a shortage of bonds it can buy.
"I don't think we will get anything concrete in terms of changes to the programme, but I think Draghi will be very keen to stress that he is prepared to use the full force of the ECB's capability," said DZ Bank strategist Christian Lenk.
"But, of course, there is a downside risk he will drop hints on tapering, which I think is quite unlikely, but maybe that is why the market is a bit nervous this morning," he said.
Euro zone bond yields have risen from record lows in recent weeks partly because of reports the ECB may reduce the scale of asset purchases before the programme ends.
The yield on Germany's 10-year Bund rose from minus 0.16 percent at the end of September to close Wednesday at 0.03 percent. On Thursday, it edged higher to 0.04 percent, mirroring the move across the euro zone government bond market .
The ECB's 80 billion euro a month purchase programme is scheduled to end in March 2017, and the overwhelming expectation is that it will be extended by at least six months.
"We expect president Draghi to do his utmost best to quell the taper speculation and re-frame the debate back to a probable QE extension in December, when we also expect changes to the PSPP (bond-buying programme) modalities to be announced," ING strategists said in a note.
The central bank is expected to tweak the terms of the programme to address a shortage of higher-rated euro zone government bonds, many of which trade below the deposit rate and are therefore ineligible for purchase by the ECB.
Its options include removing a cap on ownership of individual bonds, dispensing with the deposit rate floor, which sets a minimum yield for the bonds it can buy, and changing the terms of the capital key that governs how much of each country's bonds the ECB can purchase.
Before the ECB meeting, Spain is scheduled to sell 50-year bonds via auctions in what will be a further test of appetite for long-dated debt.
"It is the first reopening of the ultra-long bond since its launch this May, but the recent launch of a 50-year (Italian) BTP showed that demand in the sector remained strong," ING strategists said.
Earlier this month, Italy generated demand in excess of 18.5 billion euros for a 5 billion euro 50-year bond.
Spain is also scheduled to sell three-year and 10-year bonds as part of the auctions.
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