German yields rise before Fed decision on trimming stimulus
* Fed expected to announce trimming monetary stimulus
* Bund yields rise in below-average volumes
* Italian bonds steady before Berlusconi vote
By Marius Zaharia
LONDON, Sept 18 (Reuters) - German bond yields rose on Wednesday before the end of a two day Federal Reserve meeting and the possible announcement of a move to trim the U.S. central bank's hefty monetary stimulus.
A statement from the Fed is expected at 1800 GMT.
Market attention was also focused on a television address by former Italian premier Silvio Berlusconi about half an hour later, which political sources said could ease worries about a collapse of the country's fragile ruling coalition.
Latest Reuters polling of economists shows a consensus for the Fed tapering its monthly bond-buying by a modest $10 billion from $85 billion at present. That was less the $15 billion cut forecast in August, although there were a variety of views in the market for how high a figure was priced in.
With many investors seeing the move as the beginning of the end for the ultra-loose policy employed by major central banks, the tone of the statement and Fed Chairman Ben Bernanke's speech may be more important than the actual number.
German 10-year yields were 3 basis points higher on the day at 1.95 percent, while Bund futures closed 35 ticks lower at 137.72.
"The majority of the moves we're seeing are last-minute positioning before the (Fed) announcement," said Investec chief economist Philip Shaw, whose base case scenario is for a $10 billion reduction of monthly asset purchases to $75 billion.
"Although that is the consensus, there is a widespread range of views in the market, including some who don't expect any tapering at all, so we can see some big market moves tomorrow."
An anecdotal measure of how volatile markets were expected to be after the Fed meeting was that investors were trading options on 10-year U.S. Treasuries that strike on a 12 basis point move in yields either way between 1600 GMT and 1900 GMT.
Market participants said this was not a regularly-traded instrument and it only popped up ahead of big events. Ten-year U.S. yields were last 2.4 bps higher at 2.8737 percent, having hit 3 percent for the first time in more than two years earlier in September.
The size of the market move in the European session was exacerbated by the low volumes, with the majority of investors reluctant to make any big shifts in asset allocation before the meeting, seen as the biggest financial event so far this year.
Volumes in the Bund future were about 500,000 lots, compared with a daily average of 780,000 this year, Reuters data showed.
"Given the massive event risk I can't imagine too many people wanting to get involved in any way at this stage," one trader said.
BERLUSCONI VS FED
Italian bonds outperformed other euro zone debt for most of the trading session as Berlusconi was expected to steer his political allies away from moves to bring the government down.
Caution set in towards the end of the session, with 10-year yields steady at 4.40 percent.
Allies of the former premier had threatened to withdraw support for Prime Minister Enrico Letta's ruling coalition if a Senate vote later in the day sees Berlusconi expelled from parliament following his tax fraud conviction.
Berlusconi's address was originally expected on Tuesday but aides said it was now likely just before the Senate committee begins voting at 1830 GMT - at a time when most investors would be more concerned about the Fed.
"I can't predict what Berlusconi is going to do. Nobody can. Italian politics are like a multi-headed snake. You cut one out and then another one pops out," said David Keeble, global head of fixed income strategy at Credit Agricole in New York.
"But I don't think he will steal the show."
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