German bond yields edge up ahead of Ifo business sentiment data

LONDON: German bond yields opened a fraction higher on Wednesday as investors tentatively awaited the latest indication of business sentiment in the euro zone's largest economy.

Markets expect a modest fall in Germany's Ifo reading for September, due at 0800 GMT, which is being closely watched after data showed a decline in the country's manufacturing sector on Tuesday, adding to an erosion of inflation expectations.

This slump in economic indicators, allied with a weak take up for the ECB's new set of emergency loans last week, has raised the prospect that the European Central Bank (ECB) will have to resort to other measures to kickstart the recovery.

Some strategists say without any improvement in the growth outlook, the ECB will soon have to start buying government bonds in a broad-based asset purchase programme known as quantitative easing (QE).

"The main knockout for sovereign QE would be a pick-up in nominal growth," said RBS analysts, referring to Ifo.

RBS's base case scenario is that QE will be needed in March 2015 and will push German 10-year yields as low as 0.65 percent.

German 10-year yields rose 1 basis point to 1.02 percent.

ECB chief Mario Draghi reiterated on Wednesday that euro zone monetary policy would remain accommodative for a long period and that the goal was to push ultra-low inflation back up closer to the two percent level.

The ECB's preferred market measure of inflation outlook - the five-year, five-year forward breakeven rate - has fallen below levels seen in the most acute phases of the euro crisis in recent days.

Lower-rated sovereign bonds lagged their peers in core European markets as investors lost some of their appetite for riskier assets after US and Arab allies' air strikes on militant groups in Syria for the first time on Tuesday.

Spanish, Italian and Portuguese 10-year yields all opened 2 bps higher at 2.42 and 2.22 percent and 3.22 percent, respectively.

Greek equivalents were flat at 6.08 percent, pausing after a steep sell-off on Tuesday sparked by concerns that the country's plans for an early bailout exit could hamper future debt relief and create more risks for private investors.