No shaking off taper fears for euro zone bond markets

Germany's 10-year government bond yield hit a five-week high on Thursday, with investors unable to fully shake off jitters that the European Central Bank is getting ready to scale back its massive monetary stimulus programme in the months ahead.

Comments from ECB chief Mario Draghi on Tuesday were seen as opening the door to monetary policy tweaks, fuelling market expectations that the central bank could announce a reduction in stimulus in September.

ECB sources told Reuters on Wednesday that markets had over interpreted Draghi's comments, allowing bond yields to pare some of their sharp increases.

However, in a week during which Bank of England Governor Mark Carney has also raised the spectre of an interest rate hike in Britain in the coming months, nervous investors stayed away from rate-sensitive bond markets.

"Seeing the fall-out of Tuesday's speech from Draghi, ECB officials showed some effort to downplay the message," analysts at ING said in a note.

"The 10-year Bund yield, consequently, dropped back somewhat, but the 'damage' has been done and yields have settled in the upper half of the year-to-date trading range."

Germany's benchmark 10-year bond yield jumped 5 basis points to 0.42 percent, its highest level in five weeks.

It has risen roughly 19 bps from seven-week lows hit two weeks ago.

Other yields across the single-currency bloc were 5-6 bps higher on the day. U.S. Treasury yields, which have been dragged higher by large moves in their European peers this week, also nudged up in early London trade.

In the euro zone, focus turned to inflation numbers from Germany - the bloc's biggest economy - later on Thursday for the latest clues on the monetary policy outlook.

A shortage of eligible bonds for the ECB's purchase programme has also fuelled speculation that the central bank may have to start unwinding its asset-purchase scheme sooner rather than later.

This week's Draghi comments only highlight that the tapering discussion at the ECB will become more pertinent in coming months, analysts said.

"We are approaching the point where the ECB is going to have to discuss tapering as it's running out of eligible bonds to buy for the scheme," said Commerzbank rates strategist Rainer Guntermann.

"And Draghi has painted a scenario where there is a also fundamental reason for that if the ECB looks past recent subdued inflation data."

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets

(This article has not been edited by DNA's editorial team and is auto-generated from an agency feed.)