March 19, 2018 / 11:42 AM / 8 months ago

UPDATE 3-Euro, bond yields spike as ECB debate seen shifting to rate path

* ECB debate shifting to rate path from QE, sources say

* Brexit transition deal announcement weighs on bonds

* Bund yields up 3 bps

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices, adds quote)

By Dhara Ranasinghe and Fanny Potkin

LONDON, March 19 (Reuters) - The euro jumped and bond yields in the currency bloc rose on Monday after a source-based story from Reuters that ECB policymakers are shifting their debate from quantitative easing to the expected path of interest rates.

Later on, yields fell again, pushed lower by a sell-off in technology stocks that increased demand for safe assets.

That shift comes as even some of the ECB’s most dovish rate setters accept that lucrative bond purchases should end this year, sources close to the discussion said.

Policymakers are comfortable with market forecasts, including for a rate hike by mid-2019, and the debate is increasingly about the steepness of the rate path thereafter, as some want future expectations contained given the slow rebound in inflation, five sources with direct knowledge of the discussion told Reuters.

“For me, the bond market move is driven by the ECB language so there is a significant move in rates,” said Rabobank rates strategist Lyn Graham-Taylor. “It’s led to a bit of a firmer pricing for a Q2 (2019) rate hike than some people had expected.”

Better-rated bond yields were up to 1 basis point higher on the day.

German bonds, regarded as among the safest assets in the world, came under additional selling pressure after the European Union said it had agreed to grant London a status-quo transition after it exits the bloc next year, until the end of 2020 .

Bond yields fell last week after ECB officials, including President Mario Draghi, suggested that asset buying will end only when the bank is satisfied that inflation is on a sustained path towards its near 2 percent target.

Germany’s 10-year Bund yield rose as high as 0.608 percent , before falling back to 0.563 percent, as a sell-off in technology stocks pushed investors towards safer assets.

“The tone on markets has turned negative towards risk assets due to a combination of the news about Facebook and worries about the U.S trade adverse policies. The impact can be seen on bond yields,” said Antoine Bouvet, a fixed incomes strategist at Mizuho.

U.S. stocks slid about 1 percent on Monday, with volatility spiking, as Facebook’s shares sank after reports that its user data was misused. That led to concern over broader privacy violations and sparked a sell-off in technology stocks.

Money market pricing shows investors have pushed back expectations for the timing of an ECB rate rise to the second quarter of next year from the first quarter.

“The market has delayed the onset of tightening to the second quarter of 2019,” said ING senior rates strategist Martin van Vliet. “Inflation is still too low and that helps explain the recent dovish rhetoric.”

A broadly positive picture of the inflation outlook was painted by Francois Villeroy de Galhau, Klaas Knot and Jens Weidmann on Sunday.

The Fed is expected to raise its policy rate to a range of 1.5 to 1.75 percent at the end of its two-day meeting on Wednesday. It will be the first meeting under its new chairman, Jerome Powell.

Reporting by Dhara Ranasinghe; Additional reporting by Saikat Chatterjee and Fanny Potkin; editing by Larry King

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