July 4, 2018 / 11:16 AM / in 9 months

UPDATE 2-Long-term euro zone yields pinned near lows on ECB duration bet

* ECB focus on long-dated debt keeps euro zone curves flat

* German state NRW set to be first to benefit, preps 50-year bond

* Most euro zone yields edge up in late trade

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices for close)

By Abhinav Ramnarayan

LONDON, July 4 (Reuters) - The gap between short- and long-term euro zone borrowing costs was near its tightest in over a week on Wednesday as the European Central Bank appeared to push on with plans to focus its bond-buying on longer-dated debt.

The ECB stepped up purchases of government bonds in June to their highest level this year and Commerzbank suggested the central bank had also increased the duration of its purchases. Reuters reported last week that this would be the bank’s focus in the future.

That has helped drive the yield spread between Germany’s two- and 10-year debt to the flattest in a year at 97 basis points. The gap between 10- and 30-year yields has narrowed 10 basis points over the past week.

The moves in the German curve also follow the flattening momentum in the U.S. Treasury bond market, where the two-10 yield spread has fallen under 30 bps to the tightest levels in over a decade.

Elsewhere, French 30-year borrowing costs are close to their lowest level in 18 months and the Italian 10s/30s bond yield spread has tightened 18 basis points over the past week to 74 bps.

“This is hugely important because at the end of the day the amount of stimulus depends on the amount of duration the ECB extracts,” said Commerzbank strategist Christoph Rieger.

HSBC reckons 10-year German Bund yields could end the year as low as 0.4 percent, slashing its previous 0.75 percent forecast because of global growth concerns and the recent flare-up in German political tensions.

Central bank buying of longer-dated debt magnifies the effect of the monetary policy by providing an incentive for long-term borrowing and, by extension, further spending.

It also allows countries and companies to term out their debt profiles and make them more sustainable. The German state of Nord Rhein Westphalia looks to be the first to benefit as it plans a 50-year bond sale on Wednesday.

At the last update, it was planning to raise 1.25 billion euros from the sale. [nL8N1U026Y.

“The demand for 50-year is there for good reason. There’s a lot of convexity value for pension funds and for asset managers,” said Rieger of Commerzbank.

Belgium’s Flemish Community was also in the market for a 20-year bond on Wednesday, and was set for a 750 million euro deal.

Trade was generally thin due to the Independence Day holiday in the United States, with most euro zone bond yields drifting higher in late trade.

Meanwhile, euro zone business activity nudged up slightly faster than previously thought last month, surveys showed. But with companies at their gloomiest since late 2016, a more robust rebound seemed unlikely.

Reporting by Abhinav Ramnarayan; Editing by Toby Chopra

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