(Refiles to fix typo in par 2.)
* Long-dated bonds sell off, reversing Friday’s yield falls
* Investors adjust expectations ahead of Thursday ECB meeting
* Positive German and euro zone data adds to picture
* Germany considers ‘shadow budget’ to circumvent debt rules
By Yoruk Bahceli and Dhara Ranasinghe
LONDON, Sept 9 (Reuters) - Germany’s bond yields rose to one-month highs on Monday after a report that the country is considering the creation of a “shadow budget” that would allow Berlin to boost public investment above and beyond limits set by its strict national debt rules.
Yields across the single currency bloc were higher on the back of encouraging economic data and receding expectations for aggressive European Central Bank policy action at this week’s closely-watched meeting.
The bond market sell-off gathered pace after Reuters, citing courses with familiar with the discussions, reported Germany was considering setting up independent public entities to take on new debt that would not be accounted for in the federal budget. That would allow Germany to boost spending on infrastructure and climate protection up to limits set by the European Union, rather than its national debt brake.
Germany’s 10-year Bund yield rose to a one-month high at -0.565%, while longer-dated 30-year bond yields were 10 basis points higher on the day at -0.02% — within striking distance of positive yield territory.
“The German story is of some significance,” said Lyn Graham-Taylor, fixed income strategist at Rabobank.
“It looks like it (extra spending) will be by a public body not the state directly. Also if you get big fiscal stimulus from Germany, that could make QE (quantitative easing) less likely.”
Markets expect the ECB to deliver easing steps that include rate cuts to boost weak growth at Thursday’s meeting. But expectations for a fresh round of QE have been tempered by comments from ECB officials in the past two weeks.
The position adjustment in bond markets continued amid slightly positive signs from economy data, with most longer-dated bond up 10 to 12 basis points .
German exports unexpectedly rose in July, suggesting the euro zone’s biggest economy may be withstanding some of the impact of tariff disputes and Brexit uncertainty.
A euro zone business sentiment survey also indicated that investor morale improved slightly in September.
“If there are net new purchases, the ECB would spread these out over the curve, possibly buying more duration. This is why the ultra-long end is more affected (by lowered quantitative easing expectations),” said Commerzbank rates strategist Rainer Guntermann.
Overall trade was expected to remain subdued as investors wait to see just what stimulus the ECB delivers this Thursday.
“With the European Central Bank on tableau for this week I don’t expect any significant market movements ahead of the meeting,” said Rene Albrecht, rates strategist at DZ Bank.
At the very least, money markets show investors expect a 10 basis point cut in the deposit rate to -0.50% in what would be the first cut since 2016.
Some investors are betting on a bigger 20 bps cut; nearly a quarter of economists polled by Reuters anticipate this too.
Nearly 90% of economists polled by Reuters also expect the ECB to announce a return to quantitative easing, starting with monthly asset purchases of 30 billion euros from October. (Reporting by Yoruk Bacheli and Dhara Ranasinghe; Editing by Toby Chopra)