March 31, 2017 / 7:42 AM / 4 months ago

Bonds of euro zone laggards quiver with ECB poised to trim QE

4 Min Read

* Low-rated bond yields rise slightly

* Tapering of ECB's bond-buying begins Monday

* Euro area inflation data due at 1000GMT

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

By John Geddie

LONDON, March 31 (Reuters) - There were tentative signs that the euro zone's weakest members would be hit the hardest by an imminent scaling back of the European Central Bank's asset purchase programme in debt markets on Friday.

The yield, an indication of borrowing costs, on bonds of southern euro zone states including Portugal and Italy nudged higher in the final day of trading before the ECB drops its monthly purchases of debt from 80 billion to 60 billion euros.

These weaker so-called peripheral states are seen as most dependent on the trillions of euros the ECB has spent over the last few years to shore up growth and inflation.

And as a tentative recovery gathers steam, some policymakers, including Dutch central bank head Klaas Knot, are calling for speedier so-called tapering of the scheme set to run until at least December.

"The unwinding generally is a risk-off event and for a lot of peripheral countries it doesn't take a lot in terms of higher financing costs for their debt stock to look problematic," Rabobank strategist Lyn Graham-Taylor said.

With the first scaling back of the ECB's government bond-buying scheme that began in early 2015 taking effect on Monday, investors have become increasingly nervous about how quickly policymakers might withdraw monetary stimulus.

It also comes at a time when the world's biggest economy, the United States, is tightening monetary conditions. New York Fed President William Dudley called on Thursday called for more rate hikes and an eventual trimming of its bond portfolio.

But Reuters revealed this week that ECB officials are wary of making any new change to their policy message at their April meeting after small tweaks to their forward guidance this month unsettled markets.

That view was reinforced by weaker-than-expected German inflation data on Thursday and comments from various ECB policymakers including chief economist Peter Praet who said he is still not convinced a recent inflation rise will be durable.

Euro wide inflation data is due at 1000GMT, with economists polled by Reuters expecting an annualised growth of 1.8 percent in March.

In the last two weeks alone, Germany's 10-year yield - the bloc's benchmark - has swung from 14-month highs of 0.51 percent to one-month lows of 0.32 percent hit on Thursday.

On Friday, it was unchanged at 0.33 percent outperforming lower-rated bonds.

Yields on Italy and Portugal's 10-year yield climbed 2 basis points to 2.32 percent and 3.97 percent respectively, climbing off two-week and one-month lows hit on Thursday.

Weak consumer spending data also hit French bonds, adding to investor nerves about an upcoming presidential election where one of the leading candidates is far-right, eurosceptic Marine Le Pen.

French 10-year bond yields rose 2 basis points to 0.96 percent, coming off a near one-month low hit Thursday.

The euro held near two-week lows against the U.S. dollar .

For Reuters 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 Andrew Heavens

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