Euro zone bond yields hold near multi-year lows on ECB rate tiering talk

LONDON: Core euro zone government bond yields held near multi-year lows on Thursday as speculation mounted that the ECB would introduce a tiered deposit rate to ease strains on banks amid continued low economic growth.

European Central Bank chief economist Peter Praet told Bloomberg that ECB staff were examining the issue of tiering, but that it was premature to talk of its introduction.

Expectations of interest rate tiering fuelled a huge rally in bond markets on Wednesday, after comments from ECB President Mario Draghi boosted talk that the ECB may be considering steps like that to ease pressure on banks.

The move south in yields gathered momentum after a Reuters report that the ECB is looking at ways to cut the charges banks pay on their excess cash to offset the side-effects of sub-zero rates.

On Thursday, bond yields were a touch higher but largely within sight of lows hit this week.

Germany's 10-year bond yield rose 1 basis point to minus 0.07 percent, keeping Wednesday's 2-1/2 year low of minus 0.09 percent in sight.

"It's an absolutely crazy environment," said Brian Giuliano, vice president of portfolio management for fixed income at Brandywine Global in Philadelphia.

"On the ECB, I get why they are talking about LTROs, I get why they are talking about a dovish pivot in pushing out rate hikes," he said. "Should we be cutting rates now? I don't think it's that dire in the euro zone."

In a further sign that markets are concerned the ECB will not be able to meet its inflation target, a key market gauge of long-term euro zone inflation expectations hit its lowest since September 2016, below 1.31 percent..

The measure, tracked by the ECB, is down some 10 bps this week and within sight of record lows hit in 2016.

Jan von Gerich, rates strategist at Nordea, pointed out that Draghi on Wednesday said the gauge illustrates a fall in the inflation risk premia, rather than the expectation that inflation will actually fall to that level.

Data released on Thursday did little to lift the mood either. Euro zone economic sentiment eased more than expected in March, mainly because of a deteriorating mood in industry and services, European Commission data showed.

Support for safe-haven assets may also be coming from concerns over Britain's EU exit. The British parliament on Wednesday failed to reach an agreement on the progress of Brexit, rejecting all eight alternative options.

Ten-year Gilt yields fell to their lowest since September 2017 at 0.968 percent before drifting higher in late trade .

A sell-off in equity markets weighed on sentiment towards riskier euro zone bond markets. Italy's 10-year bond yield rose 4 bps to 2.47 percent with new supply adding to the upward pressure on yields.