Euro zone bond yields edge up as bets on ECB easing subside

Tue Apr 29, 2014 7:42am EDT

* Draghi tells German lawmakers QE some way off
    * Rise in Eonia rates sparks talk of ECB rate cut
    * Banks increase take-up at weekly ECB weekly cash offer

 (Updates with ECB tender, more comments)
    By Marius Zaharia
    LONDON, April 29 (Reuters) - Euro zone bond yields edged
higher on Tuesday as signs of a pick up in German inflation and
prospects that money market tensions could soon subside eased
pressure on the European Central Bank to loosen monetary policy.
    Data from federal states pointed to a rise in Germany's
April inflation that should in turn lift the figure for the euro
zone from last month's 0.5 percent - far below the ECB's target
of just under 2 percent. 
    The data should further quell speculation the ECB will start
a programme of asset purchases with newly printed money after
ECB chief Mario Draghi reportedly told lawmakers from Germany's
ruling coalition on Monday that such a move was some way off.
    Concerns that the dwindling amounts of spare cash in the
euro zone's banking system could keep money market rates
elevated  - putting pressure on the ECB to ease - also subsided
after banks took the most in one-week loans from the central
bank since the last week of June 2012. 
    German 10-year Bund yields, the benchmark for
euro zone borrowing costs, rose 3 basis points to 1.53 percent.
Spanish and Italian yields rose by a
similar amount to 3.10 percent and 3.17 percent, respectively.
    "Yields are rising because the likelihood of an immediate
step (to start buying assets) by the ECB declined today," said
Emile Cardon, a market economist at Rabobank in Utrecht.
    Despite the drop in expectations of imminent ECB easing, an
auction of 8.8 billion euros of Italian bonds went smoothly,
with 10-year borrowing costs falling to a new record low of 3.22
percent. 
    It was the first sale since Fitch Ratings raised the outlook
on Italy's BBB+ rating to positive from stable, citing better
funding conditions and the end of a two-year long recession.
    "Market dealers (are) still showing interest in the
country's debt due to the encouraging prospects also depicted by
the recent credit review," Newedge market economist Annalisa
Piazza said.     
    
    TIGHT LIQUIDITY
    The 172.6 billion euro take-up from banks at the ECB's
weekly tender compares with last week's 121.8 billion euros,
resulting in a more than 50 billion euro cash injection into the
euro zone banking sector for next week.
    Another 62 billion euros can be added to that after the ECB
opted not to drain an amount equal to its current holdings of
government bonds purchased via its Security Markets Programme at
the height of the crisis. 
    That weekly sterilisation operation was introduced to dampen
fears that the SMP programme was a way of directly financing
governments, something the ECB is not allowed to do. 
    This injection of more than 100 billion euros comes as
pressure has grown for the ECB to tackle a rise in money market
rates caused by a drop in the level of spare cash in the system
to as little as 86.6 billion euros, its lowest since 2001.
    Overnight bank-to-bank Eonia borrowing costs rose
to 0.398 percent on Monday, the highest Eonia rate since 2011
with the exception of two liquidity-tight days at the end of
last year and at the end of the first quarter of 2014.
    Central banks would prefer overnight rates to trade within
the band formed by their key deposit and refinancing rates - now
at 0-0.25 percent in the euro zone. When rates step outside that
corridor, monetary policy becomes less effective. 
    Draghi said earlier this year an "unwarranted" rise in money
market rates would be a trigger for further monetary policy
easing along with a worsening of the inflation outlook.
    "The liquidity injection will move (Eonia) back below the
refi rate in coming days," said FXPRo chief economist Simon
Smith. "Thereafter it will depend on what happens at (the next)
weekly operations."

 (Reporting by Marius Zaharia; Editing by Catherine Evans)
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