LONDON: A slight rise in euro zone bond yields in recent weeks has eased immediate pressure on the European Central Bank to address a scarcity of bonds for its monetary stimulus programme when it meets this week, though a pre-emptive move is not ruled out.
Having fallen quickly and sharply in the wake of June's Brexit vote, yields across the euro area have crept back up. German Bund yields are 15 basis points above record lows hit in July and French, Dutch and Finnish yields are 7-9 bps above record lows .
The small back-up in yields has created some space for the ECB, which faces a scarcity of eligible bonds for its 1.7 trillion euro asset-purchase programme to boost inflation and growth.
More bonds are now offering a yield above the bank's eligibility threshold.
While the ECB is expected to leave monetary policy unchanged when it meets on Thursday, the central bank could use the opportunity to extend its bond-buying scheme and tweak the parameters of its programme to ease its scarcity issues.
"There's a decent probability of tweaks being made. The only problem I have with this assessment is that ECB officials in recent weeks have denied that there are scarcity issues," said ING senior rates strategist Martin van Vliet.
"But if you believe that they will extend the programme then it makes sense for them to address bond scarcity."
About 57 percent of the German bonds on the ECB's shopping list are ineligible for its asset-purchase programme because they yield less than the deposit rate, according to Swiss wealth manager Pictet.
That's not much changed from levels at the time of the ECB's last meeting in July.
Germany is the region's benchmark issuer and the bulk of purchases for the bond-buying programme are made there.
SCARCITY
According to Nordea, the ECB could run out of eligible bonds in the euro zone to buy around the turn of the year unless it eases its own restrictions.
"Even for Finland, at this level of yields, the (ECB) can probably still buy for another 5-6 months. Another fall in yields however could reduce that horizon, hence the ECB may want to be pre-emptive," Societe Generale said in a note.
Most bond yields across the euro area were flat to 3 basis points lower on Monday as Friday's weaker-than-expected US jobs data prompted investors to scale back expectations for a near-term rise in US interest rates.
The yield on Ireland's 10-year bond dropped even more, by 5.5 bps to 0.43 percent after ratings agency DBRS maintained the country's rating at A (High) with a stable outlook.
Options open to the ECB include dropping the rule on not buying debt yielding less than the deposit rate, which is at minus 0.40 percent. It could also scrap a rule barring it from buying more than 33 percent of any bond, so long as it does not have a Collective Action Clause.
Radical steps such as a change to the capital key, the system whereby the ECB buys bonds in euro zone countries in proportion to the size of their economies, are not expected for now.
Still, ECB chief Mario Draghi could use his news conference on Thursday to hint at further monetary easing down the road. Inflation remains low and long-term market inflation expectations, measured by five-year, five-year breakeven rates, are at 1.27 percent.
That's not far off record lows of around 1.25 percent hit in July and well below the ECB's inflation target of close to 2 percent.
"We're a trillion euros into the asset purchase programme and inflation is still low, so something has to give," said Rabobank strategist Matthew Cairns.
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