* Bloomberg report on ECB plan for winding down QE rattles
* Bond yields rise to two-week highs
* Analysts say further QE extension likely
* But mere notion of "tapering" unsettling investors
By Dhara Ranasinghe
LONDON, Oct 5 Most euro zone bond yields rose to
two-week highs on Wednesday, with investors on edge a day after
a media report served as a reminder that the European Central
Bank's massive asset purchases will eventually be wound down.
The ECB has not discussed reducing the pace of its monthly
bond buying, a central bank media officer tweeted late on
Tuesday in response to a Bloomberg article that cited sources as
saying the ECB would probably wind down its bond buying
gradually before ending quantitative easing.
While many analysts still expect the ECB to extend its 1.7
trillion euro programme beyond March next year as is currently
planned, the mere notion that bond buying will one day come to
an end was enough to spook global bond markets.
The talk of a potential "tapering" of QE comes at a time
when investors are questioning whether central banks are winning
the battle to boost growth and inflation, and whether
governments should do more of the heavy lifting.
"I am surprised at the reaction, but it's just this notion
that the ECB may be discussing tapering one day that has upset
the market," said ING rates strategist Benjamin Schroeder. "If
you kick off a QE programme you have to think from the start
about how you will exit it."
Euro zone bond yields rose sharply for a second straight
day, with benchmark German 10-year Bund yields hitting a
two-week high at minus 0.040 percent -- taking its increases
over the last two sessions to almost 6 basis points.
U.S. and Japanese bonds yields have been dragged higher,
while the euro extended its bounce.
ECB asset purchases, launched early last year, have been a
key driver of lower bond yields across the euro zone - helping
drive benchmark German bond yields into negative territory and
anchor borrowing costs in lower-rated countries such as Portugal
and Italy at times of volatility.
In a weekly note, analysts at Bank of America Merrill Lynch
said market speculation about ECB tapering had dominated
conversations with clients.
Comments from ECB officials in recent weeks suggesting the
central bank is in no immediate hurry to address a scarcity of
eligible bonds for QE or extend the programme has added to a
sense that ECB policy action is nearing the end of its
Inflation in the euro zone is just 0.4 percent, well below
the ECB's target of close to but below 2 percent.
Following September's policy meeting, ECB chief Mario Draghi
said the central bank had not discussed extending asset
purchases, sparking a sell-off in bond markets.
"Fundamentally there's no reason to taper as they are not
close to achieving their inflation mandate," said Patrick
O'Donnell, an investment manager at Aberdeen Asset Management.
"The reason you would taper is if you feel the policy is not
working or the negative effects outweigh the positive effects of
Low bond yields and a narrow gap between long- and
short-dated yields hurts banks' profitability, and the euro zone
banking sector is struggling.
Across the euro zone, 10-year yields were 3-6 bps higher on
the day with Dutch, Finnish, Spanish and Italian yields also
hitting their highest levels in around two weeks.
Germany is scheduled to sell four billion euros of 10-year
bonds later in the day.
(Reporting by Dhara Ranasinghe; Editing by Toby Chopra)