Yields rise, euro dips as ECB trims bond purchases

NEW YORK (Reuters) - Bond yields rose and the euro dipped on Thursday after the European Central Bank said it would prolong its bond purchase programme but surprised investors by scaling back on how much it will spend each month. Wall Street stocks closed higher.

Slideshow ( 3 images )

The euro saw its biggest one-day percentage drop against the dollar since June after the ECB said it would reduce its bond buying programme to 60 billion euros (£50.6 billion) a month from 80 billion, but extended it from April to December 2017.

ECB President Mario Draghi said it was not an outright winding-down of quantitative easing (QE) but this did not completely reassure fixed income investors.

“Currencies are reacting more to the extension and bonds are focused on the taper,” said Frances Donald, senior economist at Manulife Asset Management in Boston. “The total announcement today is more easing than expected. It may take more time for the bond market to recognise that.”

The euro EUR= was last down 1.3 percent at $1.0614 after surging to $1.0875 after the ECB's statement. The dollar .DXY rose 0.9 percent against a basket of major currencies after the ECB news and ahead of next week's Federal Reserve meeting at which a rate hike is expected.

“It didn’t help the euro was at the highs; we had a clearing of euro shorts after the Italian referendum,” said Vassili Serebriakov, FX strategist at Credit Agricole in New York referring to an Italian vote against constitutional reform days before the ECB meeting.

The S&P 500 benchmark stock index rose, with its biggest boost from financials, followed by the materials sector.

“This is just a continued melt-up post-election. The path of least resistance has been higher,” said Jason Ware, chief investment officer with Albion Financial Group in Salt Lake City. “Seasonally, you have a strong period. You have money coming out of the bond market ... so that money has to go somewhere.”

The Dow Jones industrial average .DJI closed up 65.19 points, or 0.33 percent, to 19,614.81, the S&P 500 .SPX gained 4.84 points, or 0.22 percent, to 2,246.19 and the Nasdaq Composite .IXIC added 23.59 points, or 0.44 percent, to 5,417.36.

The benchmark U.S. 10-year Treasury note's US10YT=RR yield was up over 4 basis points at 2.393 percent, retreating from a session high of 2.427 percent.

The 10-year yield held below the 2.492 percent level reached on Dec. 1, which was its highest since July 2015, according to Reuters data. The German 10-year Bund yield DE10YT=RR was up 3 basis points at 0.379 percent.

“It’s not what the market had expected and hoped for, but he left the door open,” said Kevin Giddis, head of fixed income capital markets with Raymond James referring to the ECB.

Oil futures snapped a three-day decline on growing optimism that non-OPEC producers might agree to cut output following a cartel agreement to limit production. [O/R]

Brent futures LCOc1 settled up 89 cents at $53.89 a barrel while U.S. crude CLc1 settled up 1.07 at $50.84, as market watchers focused on a weekend meeting of OPEC and non-OPEC producers that may result in an agreement to cut output further.

Gold XAU= nudged 0.2 percent lower.

Additional reporting by Lewis Krauskopf, Richard Leong and Karen Bretell in New York, Patrick Graham in London and Wayne Cole in Sydney; Editing by Nick Zieminski and James Dalgleish