Euro zone bond yields fall, spotlight on Draghi

LONDON: Euro zone government bond yields retreated from multi-week highs on Monday as investors looked to a speech by European Central Bank chief Mario Draghi for more policy details after he signalled last week that the urgency for further action was waning.

News on Friday that some ECB policymakers had discussed the possibility of lifting interest rates before ending quantitative easing triggered a sharp sell-off in bonds and a jump in the euro.

Monday began with a calmer tone, with investors reluctant to dump safe-haven debt ahead of Wednesday's closely-watched election in the Netherlands and as Scottish First Minister Nicola Sturgeon said she would seek authority to call a new referendum on independence.

Draghi is expected to speak in Frankfurt later on Monday. Friday's source-based report said an ECB discussion about lifting rates was brief and that there was no broad support for the idea.

The ECB on Thursday highlighted an improving economic outlook, fuelling speculation that the central bank could start to unwind its monetary stimulus later this year.

"The shift at the ECB is in line with stronger economic fundamentals, but I think we will have to wait until June to see a formal change in the ECB's forward guidance," said Cyril Regnat, fixed income strategist at Natixis.

ECB policymaker Jan Smets was reported by the Wall Street Journal on Monday as saying that last week's rate meeting was not a signal of a coming policy change but a reflection of a "changed reality".

Germany's 10-year government bond yield fell 4 basis points to 0.45 percent, pulling back from five-week highs just shy of 0.50 percent.

Across the euro zone, yields were 4-7 bps lower. Analysts said the hefty sell-off on Friday was tempting some investors back into the market.

Investors now expect the ECB to raise interest rates by March 2018 and see inflation rising higher.

A market gauge of long-term euro zone inflation, the five-year breakeven forward rate, rose to almost 1.74 percent on Monday -- its highest in more than two weeks. Investors expect the ECB to raise rates by March 2018, according to money market futures.