* Bund yields within touching distance of 1-1/2 year highs
* ECB expected to keep soft tone, action seen unlikely
* Spanish, French debt auctions expected to go smoothly
By Marius Zaharia
LONDON, Sept 5 German bond yields rose close to
1-1/2 year highs on Thursday before a meeting of the European
Central Bank, which is seen having little options of tempering a
rise in market rates amid an improved economic outlook.
Markets appeared to have cast aside worries about Syria for
the moment even as a possible U.S. military strike moved one
step closer after a Senate committee voted in favour of action.
This has cleared the way for a vote in the full Senate,
likely next week, but the House of Representatives also has to
clear the measure, meaning the move was not imminent and flows
into low-risk assets such as Bunds partly reversed.
The ECB is facing higher rates at the longer end of the
money market curve than before July, when it took the
unprecedented step of promising to keep interest rates low for a
The forward guidance was aimed at curbing the impact of
prospects of reduced global central bank liquidity, with the
Federal Reserve expected to start trimming monetary stimulus in
the United States later this month.
Since then, however, forecast-beating euro zone data has
renewed rising pressure on money market rates, which filtered
through to longer-term maturities on the benchmark German yield
curve, reflecting the fact that investors have brought forward
expectations of a rate hike.
Tighter market conditions might create discomfort within the
ECB, analysts say, as they threaten the euro zone recovery.
But with the ECB failing to agree on cutting rates in July,
when they had "extensive" talks about it and when the economic
outlook looked worse, analysts see little options for the bank
other than just maintaining a soft tone in communication.
"(Draghi) will talk dovishly, but I think his attempts to
keep a lid on ... rates will prove difficult given the Fed
outlook and the improvement in the euro zone economy," RIA
Capital Markets strategist Nick Stamenkovic said.
German 10-year yields rose 3.1 basis points to
1.967 percent, within a whisker of the 1-1/2 year high of 1.98
percent hit last month. Bund futures fell 34 ticks to
"It will be interesting to see how (ECB President Mario
Draghi) handles it given the economy is improving, but we're
expecting more of the same," one trader said. "Maybe the front
end is insulated, but everything else seems a bit heavy."
Before the ECB meeting, Spain plans to issue up to 4 billion
euros in five- and 10-year bonds, while France sells up to 8.5
billion of long-term bonds in auctions which are expected to go
The yield gap between Spanish and Italian 10-year bonds
shrank to its tightest in 1-1/2 years of 2 bps last week due to
the risk that a looming vote on whether to expel Silvio
Berlusconi from Senate could bring down the government.
Supply pressure in Spain saw the spread
widening back to about 10 bps, but some analysts
expect the move to reverse once the auction is out of the way.
"The auctions should pave the way for 10-year SPGBs(Spanish
bonds) trading flat to Italy and 10-year OATs (French bonds)
trading tighter again versus Bunds," Commerzbank strategists
said in a note.
(Reporting by Marius Zaharia and Chris Pizzey, London MPG Desk,
+44 (0)207 542-4441)