Euro zone bond yields at six-week highs as doubt cast on ECB policy impact

Reuters | Sep 13, 2019 at 10:51 AM

* Euro zone bond yields hit six-week highs

* More ECB officials cast doubt on new stimulus package

* Short-dated bonds pressured by ECB tiering policy

* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr (Recasts, updates with statements from ECB officials, French growth compact proposal, U.S. retail sales)

LONDON, Sept 13 (Reuters) - Euro zone bond yields rose to six-week highs on Friday as concern crept into the market that the European Central Bank is reaching the limits of what its policy can achieve, a day after the bank pledged indefinite stimulus to boost a weak economy.

Investors had initially cheered the ECB's rate cuts, open-ended asset purchases and steps to protect banks from the negative side-effects of sub-zero interest rates.

But concern then grew over the emphasis at ECB chief Mario Draghi's press conference on the need for fiscal stimulus to take over in boosting economic growth and inflation.

Several ECB officials cast doubt on the effectiveness of the measures on Friday.

Dutch central bank chief Klaas Knot said the stimulus package was disproportionate to current economic conditions and may be ineffective.

Slovenian central bank governor Bostjan Vasle was quoted as saying that the ECB could increase volumes and change the conditions for bond purchases if necessary.

Meanwhile, France proposed a "growth compact" for the euro zone economy following the ECB's decision and Finance Minister Bruno Le Maire urged investment from countries which have fiscal space to invest.

German, French and Dutch 10- and 30-year bond yields all rose to six-week highs on Friday.

Germany's 10-year yield rose as high as -0.48% and was set for its biggest weekly jump since early-2018.

Thirty-year German yields were back in positive territory, trading 7 bps higher on the day at 0.06%

"The numerous mentions of fiscal policy during the press conference left us with the sense that the monetary policy setters in the euro zone are a little doubtful on their ability to raise inflation without fiscal help," said Peter Chatwell, head of rate strategy at Mizuho.

Euro zone finance ministers are due to discuss reviewing fiscal rules at meetings in Helsinki on Friday and Saturday.

Analysts said the ECB's plan to resume quantitative easing and offer more generous terms on its cheap multi-year loans to banks was still a good deal for southern European countries such as Italy and Spain.

They expected spreads between German and southern European debt to keep tightening.

Still Italian bonds were not spared the sell-off; 10-year bond yields which fell to a record low of 0.758% on Thursday, rose 6 bps to 0.91%.

Short-dated bonds also came under pressure after the ECB announced tiered interest rates. Euro zone banks will be exempted from paying the ECB a penalty charge on idle cash worth six times their mandatory reserves.

This is expected to reduce demand for short-dated bonds from banks, given the more favourable terms than expected under tiering.

"From a bank's perspective, if there is more money you can put at the ECB for 0%, there is less need for buying short-dated Bunds at -0.70%," said DZ Bank rates strategist Daniel Lenz.

Reports that U.S. President Donald Trump does not rule out an interim trade pact with China also brought safe-haven bonds under pressure.

Investors will be eyeing U.S. retail sales data due at 1230 GMT.