Euro zone yields rise as Fed, ECB and BoE meetings loom

LONDON: Euro zone government bond yields edged higher at the start of a week in which the European Central Bank, the US Federal Reserve and the Bank of England are all due to meet and possibly signal a tightening of policy in the face of strong inflation.

While growing Omicron infections in Europe and the United States complicate matters and are likely to trigger some caution, policymakers either side of the Atlantic are expected to signal or hint at an end to pandemic-era measures.

The Fed is likely to lead the surge with a tapering of bond purchases earlier than previous expected, while the ECB could provide more detail on how it will unwind its pandemic emergency purchase programme (PEPP), due to end in March.

A Reuters poll of ECB-watchers believe the ECB will halve the amount of assets it buys each month from April.

"The current fourth wave of the pandemic and the new Omicron variant will add further downward pressure to the eurozone economy," ING economist Carsten Brzeski said. "At the same time, headline inflation has continued to accelerate."

Saying that the ECB has a difficult balance to strike, he thinks it unlikely that PEPP will get an extension, given comments by ECB chief Christine Lagarde and others. A postponement of the decision until February is possible, he added.

Euro zone government bond yields inched higher on Monday, with Germany's 10-year government bond yield, the benchmark for the bloc, up a basis point at -0.34%.

Other high grade euro zone government bond yields were also marginally higher on the day.

While investors have retreated in droves to the safety of government bonds since news of the Omicron variant first broke out, pushing yields to their lowest levels in months, German borrowing costs are now a good 6 basis points (bps) off those lows hit last week.

The Bank of England was expected to raise rates later this week, though is in doubt given a surge of Omicron variant cases in the UK. Interest rate hikes are in store for a raft of central banks in emerging markets from Russia to Mexico.

US inflation data on Friday helped keep yields at these slightly higher levels, coming in at 6.8%, the biggest year-on-year rise since June 1982.