Bund yields dip as faltering outlook supports ECB stimulus hopes

Wed Aug 27, 2014 4:08am EDT

* German September consumer confidence slips

* Italy must revise down GDP forecast - Finance Minister

* Bund future nears contract high, cash yields fall

* Germany's Schaeuble says Draghi comments 'over-interpreted'

* Austria's OVP party appoints new leader after resignation

By John Geddie

LONDON, Aug 27 (Reuters) - German Bund yields fell back towards record lows on Wednesday, as further evidence of the bloc's faltering economy fed market expectations for more European Central Bank stimulus.

Weaker-than-expected consumer confidence in Germany drove the market, together with reported comments from Italy's economy minister that Rome must revise down its economic output growth forecast.

Eager to tackle the euro zone's economic malaise, ECB President Mario Draghi on Friday appeared to shift the bank's policy response away from austerity towards growth. Crucially for investors, he left the door open to a broad-based programme of asset purchases known as quantitative easing (QE).

"When the EMU's largest economy is falling behind, this is very much increasing the chances of the ECB heading for further monetary measures, above all QE," said DZ Bank strategist Daniel Lenz.

German Bund futures came within a tick of the all-time contract high of 151.10 early on Wednesday, while 10-year bond yields opened 2 basis points lower at 0.928, a shade above the record low of 0.926 percent hit on Monday.

Spanish and Italian bond yields both hit new record lows for the third consecutive day, down 7 bps and 5 bps respectively at 2.12 and 2.38 percent, respectively.

With Draghi particularly concerned about the decline in market expectations of inflation, the latest consumer price growth in Germany due on Thursday and then the euro wide data on Friday will be closely watched.

While few expect the ECB to take announce further policy action at its meeting next week, one trader said investors will be "hoping for all the right noises".

But there is certainly room for disappointment as well.

Germany's Finance Minister Wolfgang Schaeuble told a newspaper on Wednesday that Draghi's comments at Jackson Hole had been "over-interpreted", particularly in reference to fiscal policy playing a greater role in promoting growth.

Elsewhere, Austrian bond yields dipped 2 bps to 1.67 percent after news late on Tuesday that Austria's conservative People's Party has picked Economy Minister Reinhold Mitterlehner to replace Michael Spindelegger as party leader, who resigned unexpectedly in a row over tax reform.

Spindelegger's departure comes amid a political battle in Europe over whether belt-tightening has gone too far at the expense of economic growth, a clash that has also forced a government reshuffle in France this week. (Editing by Hugh Lawson)

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