December 8, 2016 / 2:59 PM / 9 months ago

Euro, yields pull off highs after ECB "less for longer" tweaks to bond-buy scheme

LONDON, Dec 8 (Reuters) - The single currency and euro zone government bond yields retreated from the day’s highs on Thursday after the European Central Bank unveiled “less for longer” tweaks to its bond purchase programme.

Euro zone government bonds initially sold off while the euro strengthened after the ECB said it would trim its purchases from April 2017 but extend the programme (APP) until the end of next year. Markets had expected only a six-month extension.

“Less for longer is the take-away from the ECB so far,” said Mizuho strategist Peter Chatwell. “However, make no mistake, the ECB has eased monetary policy with this move. Moreover, a slower but longer execution does mean that in December 2017 and 2018 the APP may be doing more than we had expected.”

Most euro zone government bond yields were up 2-8 bps on the day after ECB President Mario Draghi detailed the changes, but were at or below levels hit just ahead of the ECB announcement.

Germany’s 10-year bond yield, the benchmark for the region, was up 8 bps at 0.43 percent, after falling as low as 0.37 percent, level with where it stood just before the ECB decision.

The euro initially surged after the ECB decision, but it quickly fell back and extended falls during Draghi’s news conference to trade as much as 1 percent down on the day at $1.0630.

“The euro is not behaving like a taper has just been announced and instead is making new lows for the day. The reason for this is that we have not just had a normal tapering of QE, the ECB has delivered a taper with a twist,” said OANDA analyst Craig Erlam.

The result is that the ECB has committed to buying 540 billion euros of debt from the end of April rather than 480 billion, which it would have bought had the monthly bond purchases not been reduced and the program extended by six months, he said.

German two-year yields fell after the ECB widened the maturity range for purchases and said it would buy bonds with yields below the minus 0.4 percent deposit rate.

By 1418 GMT, it was 6.4 bps on the day at minus 0.745 percent. The gap between two and 30-year German bond yields hit their widest since July 2015 as curves steepened.

In money markets, forward EONIA rates fell back, implying markets sees diminishing chance of an ECB rate rise in 2017. (Additional reporting by Jemima Kelly, editing by Nigel Stephenson)

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