December 30, 2016 / 9:26 AM / in 7 months

Investors offload long-dated bonds as QE changes loom

3 Min Read

* ECB expected to focus on short-dated bonds in 2017

* German 30-year Bund yield rises 3 bps in early trades

* Spanish inflation shoots above expectations in December

* Italy steady after 6.75 billion euro bond sale Thursday

By Abhinav Ramnarayan

LONDON, Dec 30 (Reuters) - Long-dated euro zone government bonds sold off on Friday, the last day before changes to the European Central Bank's bond-buying scheme kick in and the final trading day of 2016.

The ECB announced changes earlier this month to the parameters of the quantitative easing programme, or PSPP, that suggested the focus of purchases would shift to the short end.

The changes included removing the deposit rate floor for purchases and making the minimum maturity for eligible bonds one year instead of two. Euro zone government bond curves are expected to steepen as a result, and the market moved on those expectations on Friday.

"It will take a few weeks to see how the ECB and the national central banks adjust their purchases, but the way inflation prospects evolve as well as the PSPP will be a driver," said DZ Bank strategist Christian Lenk.

"The market is definitely prone for ongoing steepening, even if it is sometimes overdone."

Spanish consumer prices harmonised for comparison with the European Union rose 1.4 percent year-on-year in December as oil prices jumped, flash data from the National Statistics Institute showed on Friday.

"Spain is highlighted especially because growth has been good but inflation has not been as strong so far. So this is a noteworthy number," said Lenk.

Long-dated bonds are sensitive to inflation prospects.

The yield on Germany's 30-year government bond rose 3 basis points to 0.90 percent, while the 30-year yields of highly rated countries including the Netherlands, Austria and France were up 2-3 bps.

Most euro zone bond yields rose as world stocks inched higher and oil prices headed for their biggest yearly percentage gain since 2009.

Germany's 10-year yield, the region's benchmark, was up 1.4 bps to 0.19 percent, and most other euro zone government benchmark bonds were up around 1 bps.

Italy's 10-year bond yield rose in line with counterparts and was up 1 bps to 1.81 percent a day after the sovereign raised 6.75 billion euros by selling four different bonds on Thursday.

The country has been in the spotlight since Prime Minister Matteo Renzi stepped down after a referendum loss in early December and over a rescue plan for ailing lender Monte dei Paschi.

On Friday, several newspapers reported that the bank, which is being bailed out by the state, plans to issue 15 billion euros ($15.8 billion) of debt next year to restore liquidity and boost investor confidence.

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 (Reporting by Abhinav Ramnarayan; Editing by Catherine Evans)

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