January 17, 2018 / 8:28 AM / 6 months ago

UPDATE 3-Euro zone bond yields dip, ECB remains in driving seat

* Most euro zone bond yields nudge down

* German 2-year bond yields touch 6-1/2-month highs

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

By Dhara Ranasinghe

LONDON, Jan 17 (Reuters) - Most euro zone government bond yields inched down on Wednesday, as jittery investors took comfort from signs that European Central Bank rate-setters are in no rush to signal an imminent change in the bank’s policy stance.

The ECB’s Vitor Constancio said in an interview he did not rule out that monetary policy would remain “very accommodating for a long time”. The ECB’s Ewald Nowotny said recent euro strength against the dollar is “not helpful”.

That followed a Reuters source-based story on Tuesday that the ECB is unlikely to ditch a pledge to keep buying bonds at next week’s meeting. German Bundesbank President Jens Weidmann, in an interview published late Tuesday, said analyst expectations for a rate hike in the middle of next year are roughly in line with ECB guidance.

“At the moment markets are very sensitive to comments from ECB speakers,” Commerzbank strategist Rainer Guntermann said.

“What’s changing is that the ECB commentary is turning a bit more balanced now.”

Data on Wednesday confirmed that inflation in the single currency bloc remained subdued in December at an annual 1.4 percent.

Most long-dated bond yields were down 0-2 basis points on the day, although southern European bond yields were a touch higher - unwinding some of the previous session’s sharp falls. Greece’s five-year government bond yield fell to its lowest level since September on Wednesday at 2.788 percent, extending a downward move on upbeat sentiment as Greece is seen heading towards exiting its bailout programme this year.

Bond markets are showing an increased sensitivity to ECB commentary as investors try to assess when the central bank will end its 2.55 trillion euro ($3.12 trillion) asset purchase scheme and move towards raising interest rates.

Last week, minutes from an ECB meeting suggesting it may tweak its policy message in early 2018 had rattled markets.

In a sign that bond sentiment has turned defensive, two-year German bond yields touched a 6-1/2-month high at minus 0.57 percent DE2YT-TWEB and has held on to those levels.

Money market pricing suggests investors see a roughly 70 percent chance of a 10-basis-point rate rise from the ECB by the year-end, up from 50 percent early last week.

“It’s going to be a holding exercise for (ECB President Mario) Draghi at next week’s ECB meeting,” Societe Generale strategist Ciaran O’Hagan said. “But later in the year, the asset purchase programme will die away.”

U.S. short-dated bond yields rose to 2.04 percent , their highest since 2008, continuing to march higher on expectations for a pick-up in inflation and interest rates.

The Bank of Canada raised interest rates on Wednesday, highlighting that major central banks are unwinding the extraordinary monetary policies put in place after the financial crisis. ($1 = 0.8186 euros)

Reporting by Dhara Ranasinghe, additional reporting by Fanny Potkin,; Editing by Andrew Heavens

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