October 30, 2019 / 12:22 PM / 16 days ago

UPDATE 2-Euro zone bond yields steady ahead of Fed meeting

* Euro zone bond yields marginally lower

* ECB resumes asset purchased, introduces tiered rates

* Fed expected to cut rates by 25 bps

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds context on Greece)

By Elizabeth Howcroft and Yoruk Bahceli

Oct 30 (Reuters) - Germany’s benchmark 10-year bond yield held below three-month highs on Wednesday as investors awaited the outcome of a U.S. Federal Reserve meeting, while the European Central Bank resumed its bond buying programme.

Bond yields across the euro zone have risen in the past month as the prospect of a no-deal Brexit has faded, but the resumption of the ECB’s bond-buying scheme to bolster growth and inflation was expected to provide some support to regional bond markets.

The ECB said in September it would buy 20 billion euros worth of bonds a month.

“It will be first orders (from the ECB) today, but it’s more the stock effect that is having market impact, not the flow effect,” said Daniel Lenz, rates strategist at DZ Bank.

The ECB already holds over 2 trillion euros worth of bonds. While the resumed purchases are expected to support bonds, analysts say the overall impact this time will be limited.

Wednesday also sees the ECB’s introduction of tiered rates, to help mitigate the effect of negative interest rates on banks.

German annual inflation remained unchanged in October after falling three consecutive months, data showed on Wednesday, exceeding expectations.

Germany’s 10-year bond yield was flat on the day at -0.36% , off Monday’s three-month high of -0.32%.

It is up 21 bps so far in October and set for its biggest monthly jump since early 2018, largely driven by expectations that Britain will avoid a no-deal Brexit.

But the bigger focus for markets was the Fed, which concludes a two-day meeting on Wednesday.

While traders are currently pricing in a 99.5% chance of a cut on Wednesday, attention will focus on any hints about future policy.

“Omitting the reference that the Fed ‘will act as appropriate to sustain the expansion’ would be a signal that the Fed is done with its precautionary rate cuts,” Commerzbank head of rates and credit research Christoph Rieger wrote in a note.

In primary markets, Greece sold six-month T-bills at a 0.00% yield.

The sale followed an auction of three-month bonds earlier in October that priced at a negative yield, the first time ever for the Southern European country.

10-year Greek yields fell 3 basis points on the day, according to Tradeweb. Greek debt has been supported this week by a rating upgrade to BB- by S&P on Friday.

The gap between Greek and Italian 10-year yields - the euro zone’s two most indebted states - has tightened to a mere 6 bps, compared to 164 bps at the start of the year.

The spread could soon turn negative as Greek growth has been stronger than Italian this year, while Greek debt relative to GDP is on a downward trajectory unlike Italy’s, according to Capital Economics markets economist Simona Gambarini.

The euro zone’s rescue fund agreed on Monday to allow Greece to pay back earlier some of its debt to the International Monetary Fund, on which it pays higher interest than current market rates.

Unlike Greece, Italy sold 6.25 billion euros of five and 10-year bonds on Wednesday, but had to pay a three-month high yield.

Its bonds have been under pressure from S&P’s Friday rating review, which kept it at BBB with a negative outlook and victory for the far-right League in a regional election. (Reporting by Elizabeth Howcroft and Yoruk Bahceli; editing by Larry King, William Maclean)

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