5 Min Read
* Report on winding-down plan rattles markets
* Southern Europe's bond yields soar 10 bps
* German yields move out of negative territory
* Analysts say further QE extension likely
* But mere notion of "tapering" unsettles investors (Adds quote, updates prices)
By Dhara Ranasinghe
LONDON, Oct 5 (Reuters) - Euro zone bond yields soared on Wednesday, as concerns the European Central Bank might reduce the scale of its asset purchases before the programme finally ends unnerved investors.
A Bloomberg article on Tuesday cited sources as saying the ECB would probably wind down the monthly 80 billion euro ($90 billion) quantitative easing (QE) scheme gradually.
The ECB has not discussed reducing the pace of monthly purchases, a central bank media officer later tweeted. The scheme is due to run until March next year and many analysts expect it to be extended given that inflation remains low.
But the mere possibility of a scaling back or "tapering" of the scheme was enough to rattle markets already questioning whether central banks can win 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."
On Wednesday euro zone bond yields rose 8-12 basis points, led by southern Europe where the ECB bond buying has in particular helped anchor borrowing costs, especially at times of volatility.
Italy's 10-year bond yield rose to 1.38 percent, its highest level since late June, according to Reuters data. Germany's 10-year Bund yield - the euro zone benchmark - rose more than 8 bps to hit zero for the first time in a fortnight .
U.S. and Japanese bonds yields were dragged higher by the spike in euro zone yields, while the euro extended gains.
The Bank of Italy said it was essential the ECB kept the programme in place to support the euro zone economy, highlighting the nervousness surrounding any potential tapering.
Massive central bank stimulus has underpinned world markets since the financial crisis and any signs that QE might be withdrawn can cause instability.
Comments from former Federal Reserve chief Ben Bernanke in 2013 suggesting the Fed's then QE programme could be unwound sparked a sell-off in bonds and emerging markets in what became known as the "taper tantrum."
Janus Capital tweeted its fund manager Bill Gross, one of the best-known names in the bond market, as saying on Tuesday: "ECB taper tantrum underway. Bearish for global bonds."
ECB asset purchases, launched in March 2015, have been a key driver of lower bond yields across the euro zone - helping shift benchmark German bond yields into negative territory.
Comments from ECB officials in recent weeks suggesting the central bank was in no immediate hurry to address a scarcity of eligible bonds for QE or extend the programme have added to a sense that ECB policy is nearing the end of its effectiveness.
Inflation in the euro zone is just 0.4 percent, well below the ECB's target of close to but below 2 percent.
"The economic situation is still grim. So in this climate I do not believe that the ECB will lower its bond-buying," said Commerzbank's chief economist Joerg Kraemer.
"A winding down of this monthly buying volume should come at some point, but I don't think it will be in 2017."
But worries that a prolonged period of easing which keeps yields low and hurts the profitability of the euro zone's banks have escalated recently with focus on the woes of some of Germany and Italy's biggest lenders.
"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 the policy." (Reporting by Dhara Ranasinghe; Additional reporting by Joseph Nahr in Berlin; Editing by Toby Chopra and John Stonestreet)