December 14, 2016 / 12:10 PM / in 8 months

UPDATE 1-Euro zone bond yields fall with Fed rate hike priced in

(Adds quotes, updates prices)

By Abhinav Ramnarayan

LONDON, Dec 14 (Reuters) - Euro zone bond yields fell on Wednesday ahead of a U.S. Federal Reserve meeting investors expect will deliver the first rate hike in 12 months and at the same time it flags its stance for 2017.

Whereas a hike in rates would normally push yields higher, on this occasion it is fully priced in and the market is focusing on what direction Fed Chair Janet Yellen will take.

"We do not rule out the possibility that the FOMC tightens with a dovish twist and downgrades the assessment of the policy stance in the FOMC statement," ING strategist Martin van Vliet said, adding that markets are already almost fully pricing a further two rate hikes next year.

The yield on Germany's 30-year bonds led the falls, dropping 6.6 basis points to 1.08 percent by 1126 GMT. German 10-year yields fell 4.3 bps to 0.31 percent.

Dutch, French and Austrian 30-year yields were down 6-7 bps.

"If you look at how the long-end (of the government bond curve) is trading, the focus is no longer on this rate hike but on what message the Fed sends for 2017," said Mizuho strategist Antoine Bouvet.

Yields fell in other parts of the curve as well, extending Tuesday's move. ING strategists say the rally over the last two sessions is partly a delayed reaction to the European Central Bank's extension of its bond-buying scheme, announced last week.

Though the ECB said it would buy 60 billion euros of assets a month from April 2017 onwards, compared with 80 billion euros currently, it extended the programme to the end of 2017. Market expectations were for a six-month extension to September 2017.

The ECB also changed the lower yield and maturity limits on purchases. On Wednesday, Germany's two-year bond yields were a whisker from record lows, down 1.6 bps at minus 0.765 percent .

Italian government bond yields held around one-month lows after interim Prime Minister Paolo Gentiloni won an initial vote of confidence in the lower house of parliament overnight, although he is expected to face a sterner test in the upper house.

The yield on Italy's 10-year government bond dropped 6.7 bps lower to 1.81 percent, well off Monday's high of 2.13 percent.

Monte dei Paschi could reopen a debt-to-equity swap offer on Thursday if its board on Wednesday opts to push ahead with a do-or-die attempt to raise 5 billion euros ($5.3 billion) this year, two sources familiar with the matter told Reuters.

For Reuters new 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 (Editing by Jeremy Gaunt)

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