* 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 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
"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
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withdrawn can cause instability.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
(Reporting by Dhara Ranasinghe; Additional reporting by Joseph
Nahr in Berlin; Editing by Toby Chopra and John Stonestreet)