Euro zone debt yields edge up as Nowotny tempers ECB QE hopes

Mon Apr 7, 2014 12:08pm EDT

* Lower-rated euro zone yields bounce off multi-year lows

* ECB policymakers talk down imminent QE

* Markets still expect stimulus measures from ECB

* Greek yields around 4-year lows despite Moody's inaction (Updates prices, adds fresh comment)

By Emelia Sithole-Matarise and Marius Zaharia

LONDON, April 7 (Reuters) - Lower-rated euro zone bond yields rose from multi-year lows on Monday after European Central Bank policymakers tempered market exuberance over potential asset purchases by the bank.

ECB policymaker Ewald Nowotny said there was no immediate need for the bank to take steps to counter stubbornly low inflation because a strengthening of Europe's economy should reduce the danger of deflation.

His colleague Yves Mersch said the bank was drawing up plans for large-scale asset purchases or quantitative easing (QE) in case they were needed, but there was some way to go before that point.

Bundesbank Chief Jens Weidmann made no mention in his speech of QE, but stressed the ECB should not be overburdened, while ECB Vice President Vitor Constancio said extraordinary policy measures "should not be decided lightly".

The remarks prompted some investors to take profits in lower-rated bond markets following their sharp outperformance last week after ECB President Mario Draghi signalled the bank could print new money if inflation remained persistently low.

Spanish 10-year yields rose 3 basis points to 3.19 percent, with some traders citing domestic and Asian investor selling after a relentless rally this year which pushed the yields to 8-1/2-year lows.

Other low-rated euro zone bond yields were 2-3 bps higher.

"At the moment, it seems they are not fully on board with it (QE) yet," said David Keeble, global head of fixed income strategy at Credit Agricole in New York. "They are looking at it but it doesn't seem that it's about to happen."

Many in the market see these moves as a temporary setback, with the ECB still expected to ease monetary policy later this year, supporting investors' hunt for higher returns in peripheral euro zone bonds.

"The market is keen to speculate on QE," said Michael Leister, a strategist at Commerzbank. "We can easily see yields testing the lows again."

Many in the bond market took a German newspaper report on Friday that the ECB had modelled the effects of buying a trillion euros of assets to ward off deflation as adding to the likelihood of QE from the bank.

The Frankfurter Allgemeine Zeitung report, however, said one model showed 1 trillion euros of asset purchases spread over a year would boost inflation by just 0.2 percentage points, while another pointed to a 0.8 percentage point uplift.

GREECE IN NO RUSH TO MARKET

Greek 10-year yields were also slightly up, having hit new four-year lows earlier as investors shrugged off the lack of a statement from Moody's on Friday, when it had been widely expected to give an update of the country's credit ratings. Under new EU rules, rating agencies are required to lay out the dates on which they review a country's creditworthiness.

Some market participants had expected Moody's to lift Greece's ratings by as much as two notches from Caa3, which is nine notches below investment grade. Standard & Poor's and Fitch rank Greece six notches below investment grade at B-.

Demand for the country's debt remained intact as investors looked in coming months to Greece's return to the market, two years after it defaulted.

Greece has lined up a group of banks for the five-year bond issue, prompting speculation a sale could come as soon as this week, but Finance Minister Yannis Stourmaras said there was no rush, reiterating that a sale would happen in the first half of the year.

Greek 10-year yields were 2 bps higher on the day at 6.17 percent, having fallen fallen as much as 50 basis points over the past week.

"The Greek government bond market is doing well and investors are just looking for yield pick-up with the ECB's accommodative stance at this juncture," said RIA Capital Market strategist Nick Stamenkovic. (Editing by Andrew Roche)