Euro zone bonds rise, investors eye ECB speakers

LONDON Tue Nov 26, 2013 7:33am EST

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LONDON Nov 26 (Reuters) - Euro zone government bonds rose on Tuesday, as investors looked for more insight into the rates outlook from European Central Bank speakers after recent remarks reinforced bets on further monetary easing.

ECB Executive Board members Yves Mersch and Joerg Asmussen speak later. Inflation numbers on Friday will be key in moulding expectations as the market prepares for the Dec. 5 monetary policy meeting.

"If we get a weak inflation number on Friday, we will see the (easing) speculation move to another level ahead of the ECB meeting the following week," Philip Tyson, strategist at ICAP said.

"But generally people are thinking it's a bit too early for them to do anything right now. They will try to hang on, if they can, until the first quarter of next year."

A surprise fall in annual inflation for October to 0.7 percent, well below its target of just under 2 percent, prompted the ECB to cut rates this month. Inflation data for November is due on Friday and is forecast at 0.8 percent, according to a Reuters poll.

German Bund futures were up 21 ticks at 141.53, pushing ten-year German yields 1.8 basis points lower to 1.71 percent. Other highly-rated euro zone bond yields were down between 1-2 basis points.

Ten-year Italian yields also fell 3.1 basis points to 4.07 percent on solid demand at a bond sale.

Italy's two-year yields fell to a seven-month low of 1.16 percent at an auction of zero-coupon debt as reduced funding needs and the euro zone's ultra-easy monetary policy fed demand for its short-term debt.

"The ECB is providing a backstop, the short end remains pretty well underpinned," Nick Stamenkovic, bond strategist at RIA Capital Markets said before the auction.

"The underlying backdrop for peripherals is favourable but ahead of the supply on Thursday, investors might demand a bit of a concession." Italy will offer up to 2.5 billion euros of bonds maturing in 2024 on Thursday.

ECB BETS

Also key will be the ECB's staff projections to be published at next week's policy meeting, analysts said.

"All will depend on the outcome of the forecast for inflation. If inflation for next year will be 1 percent or above, this should be neutral," Piet Lammens, strategist at KBC said.

"If the inflation forecast for next year were below 1 percent, then we think the market (will be reminded of) all this dovish talk and will think the ECB is closer to another easing of policy and this might still help the overall Bund market."

ECB Governing Council member Christian Noyer said on Monday interest rates had to remain low for an extended period and might go even lower if needed, while his colleague Ardo Hansson was quoted as saying the ECB still has room to cut rates.

Earlier, ECB Executive Board member Benoit Coeure told TV station CNBC that negative deposit rates were a possibility but that he did not see a "very likely prospect" that disinflation would deepen in the euro zone.

"It's what one might call an alternative OMT (ECB bond-buying) gambit. You put something out there and say 'we can do all of this but it probably won't be necessary'," Marc Ostwald, strategist, at Monument Securities said.

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