Euro zone bond yields hit 2-month highs as ECB cuts back stimulus

LONDON: Bond yields in Germany and Italy, two of the euro zone's biggest debt markets, hit two-month highs on Tuesday as a cut in monthly ECB asset purchases became a reality and hawkish comments from a top official hurt sentiment on the first trading day of 2018.

Benoit Coeure, the Frenchman in charge of carrying out the European Central Bank's bond purchases, sees "a reasonable chance" the 2.55 trillion euro stimulus programme will not be extended again when it expires in September, he told a Chinese financial magazine at the weekend.

The comments highlight that the days of extraordinary monetary stimulus are nearing an end given stronger economic conditions and signs of a pick-up in inflation.

Data on Friday showed inflation in Germany, Europe's biggest economy, hit its highest level in five years in 2017.

ECB monthly bond purchases, which have long underpinned low borrowing costs, have fallen to 30 billion euros from 60 billion euros.

That cut in purchases from the start of January, unveiled last year, comes just as investors brace for a hefty month of supply - a potentially powerful headwind for regional bond markets.

"While the cut in ECB asset purchases is not a surprise, there is some uncertainty as to how the markets will adjust to this in an unusually heavy month for supply," said Rainer Guntermann, a rates strategist at Commerzbank in Frankfurt.

"The more hawkish commentary from the ECB is also weighing on markets."

Germany's benchmark 10-year bond yields rose 2.5 basis points to 0.46 percent, the highest level since late October.

German 30-year bond yields jumped almost 5 bps to 1.30 percent, their highest level since mid-November.

In Italy, where borrowing costs rose last week after the country's president called a general election for March 4, 10-year bond yields extended their rise to a two-month high just above 2 percent.

Most other bond yields in the single currency bloc were around 1-2 basis points higher on the day, with trade generally subdued a day after a public holiday across the world to celebrate the new year.