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UPDATE 2-Eurozone debt yields dive back towards more than 3-month lows on dovish ECB

·2-min read

* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr (Adds details, updates prices)

By Stefano Rebaudo

Dec 9 (Reuters) - Eurozone government bond yields fell back towards recent 3-1/2 month lows on Thursday as news the European Central Bank is widely considering a temporary increase to its bond purchase plan at a policy meeting next week was seen as a dovish step.

The ECB's move is in the opposite direction to the steps taken by the U.S. Federal Reserve, which is expected to step up the pace of withdrawing policy stimulus at a meeting next week against the backdrop of surging inflation.

European Central Bank policymakers are homing in on a temporary increase in the regular bond purchase scheme that would still significantly reduce overall debt buying once a much larger pandemic-fighting scheme ends in March, sources told Reuters.

At the other end, the Fed is widely expected to start raising interest rates by the third quarter of next year, earlier than expected a month ago, according to economists in a Reuters poll who mostly said the risk was that a hike comes even sooner.

"The bond market is in a wait-and-see mode ahead of next week's central banks' meetings," Massimiliano Maxia, senior fixed income specialist at Allianz Global Investors, said.

"I think yields will remain in the current trading range before tomorrow's U.S. inflation data, which might give further indications about next Fed moves," he added.

Germany's 10-year government bond yield fell 4 basis points (bps) to -0.357%. It briefly hit an end-August low of minus 0.41% on Wednesday.

Spreads between 10-year U.S. Treasury debt and equivalent German bonds widened to 183 bps from 173 bps a week ago.

Investors were shifting their focus to U.S. inflation data due on Friday and next week's central bank policy meetings. Inflation-adjusted 10-year U.S. debt yield was at a 40-year low.

"Markets will take central bankers' guidance and are now left to interpret it against the backdrop of developing Omicron news flow," ING analysts said.

Italy's 10-year government bond yield fell 4.5 basis points to 0.991%, after jumping about 10 bps on Wednesday. (Reporting by Stefano Rebaudo; Additional reporting by Saikat Chatterjee; editing by Kim Coghill and Alex Richardson)

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