GLOBAL MARKETS-Greek pledge and cautious Fed soothe investors

* Euro set for best week in over two years

* U.S. stocks set to open higher on weakening dollar

* Brent set to rack up third weekly price drop

* Greek yields fall after Athens’ assurances (Updates prices, adds U.S. stocks)

By John Geddie

LONDON, March 20 (Reuters) – The euro headed for its best week in more than two years on Friday while yields on low-rated bonds fell as investors welcomed the Fed’s caution on rate hikes and a reform pledge from Athens that could avert a cash crunch.

Illustrating the problems low inflation is causing for central banks looking to normalise monetary policy in countries such as the United States and Britain, oil was set to rack up its third consecutive weekly price slump.

Futures showed Wall Street set to open 0.3 percent higher, with stocks on course for their best week in a month, as a Fed-induced weakening of the dollar gave a boost to U.S. exporters.

European shares edged up while euro zone bond yields fell after assurances from Athens that it will submit reforms needed to unlock bailout cash. The ECB’s trillion euro asset purchase scheme was also in focus at the end of its second week.

“The outlook for European markets is better than it has been for years, and the risks now are largely political,” said Christian Schultz, senior economist at Berenberg.

Greek bond yields dropped 45 basis points to 12.10 percent, while Portuguese, Spanish and Italian equivalents were all down around 1-2 bps. German bonds — the euro zone benchmark — were flat at 0.19 percent, just above a record low.

The euro was 0.5 percent higher against the dollar at $ 1.0712, well below Wednesday’s high above $ 1.10 but leaving the single currency on track for its best week since January 2013.

“What’s been dominating the euro over the course of the last week has been the moves in the dollar. The FOMC announcement was, on margin, more dovish than expected,” said Phyllis Papadavid, senior global FX strategist at BNP Paribas in London.

The pan-European FTSEurofirst 300 share index was up 0.3 percent at 1.601.42 points, having hit a new 7-1/2 year high just after markets opened.

The impetus gained from Wednesday’s dovish statement from the U.S. Federal Reserve has begun to ease, but European indices were supported by gains in the construction sector after Holcim and Lafarge agreed to new merger terms.

Asian stocks were broadly unchanged, with MSCI’s broadest index of Asia-Pacific shares outside Japan up 0.05 percent after rallying 1.3 percent the previous day. It was on course for a gain of over 2 percent for the week.

The region’s decliners included shares in Hong Kong, Malaysia, South Korea and Thailand. Australian and Chinese stocks were among the gainers in a choppy session.

The dollar index was down 0.5 percent at 98.72 but still well above a low of 96.628 plumbed midweek. The index was on track for slight loss on the week after touching a 12-year high above 100.00 on March 13.

The dollar saw its biggest fall in six years against the euro on Wednesday, after the Fed’s dovish statement.

In commodities, Brent crude oil was down 1.3 percent at $ 53.69 a barrel, hurt by oversupply worries after Kuwait said OPEC had no choice but to maintain output levels.

U.S. crude was down around 0.5 percent, just above the six-year low of $ 42.03 a barrel hit earlier in the week.

(Editing by Catherine Evans)

Greek pledge and cautious Fed soothe investors

By John Geddie

LONDON (Reuters) – The euro headed for its best week in more than two years on Friday while yields on low-rated bonds fell as investors welcomed the Fed’s caution on rate hikes and a reform pledge from Athens that could avert a cash crunch.

Illustrating the problems low inflation is causing for central banks looking to normalise monetary policy in countries such as the United States and Britain, oil was set to rack up its third consecutive weekly price slump. [O/R]

Futures showed Wall Street set to open 0.3 percent higher, with stocks on course for their best week in a month, as a Fed-induced weakening of the dollar gave a boost to U.S. exporters.

European shares edged up while euro zone bond yields fell after assurances from Athens that it will submit reforms needed to unlock bailout cash. The ECB’s trillion euro asset purchase scheme was also in focus at the end of its second week.

“The outlook for European markets is better than it has been for years, and the risks now are largely political,” said Christian Schultz, senior economist at Berenberg.

Greek bond yields dropped 45 basis points to 12.10 percent, while Portuguese, Spanish and Italian equivalents were all down around 1-2 bps. German bonds — the euro zone benchmark — were flat at 0.19 percent, just above a record low.

The euro was 0.5 percent higher against the dollar at $ 1.0712 , well below Wednesday’s high above $ 1.10 but leaving the single currency on track for its best week since January 2013.

“What’s been dominating the euro over the course of the last week has been the moves in the dollar. The FOMC announcement was, on margin, more dovish than expected,” said Phyllis Papadavid, senior global FX strategist at BNP Paribas in London.

The pan-European FTSEurofirst 300 share index was up 0.3 percent at 1.601.42 points, having hit a new 7-1/2 year high just after markets opened.

The impetus gained from Wednesday’s dovish statement from the U.S. Federal Reserve has begun to ease, but European indices were supported by gains in the construction sector after Holcim and Lafarge agreed to new merger terms.

Asian stocks were broadly unchanged, with MSCI’s broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> up 0.05 percent after rallying 1.3 percent the previous day. It was on course for a gain of over 2 percent for the week.

The region’s decliners included shares in Hong Kong, Malaysia, South Korea and Thailand. Australian and Chinese stocks were among the gainers in a choppy session.

The dollar index was down 0.5 percent at 98.72 <.DXY> but still well above a low of 96.628 plumbed midweek. The index was on track for slight loss on the week after touching a 12-year high above 100.00 on March 13.

The dollar saw its biggest fall in six years against the euro on Wednesday, after the Fed’s dovish statement.

In commodities, Brent crude oil was down 1.3 percent at $ 53.69 a barrel , hurt by oversupply worries after Kuwait said OPEC had no choice but to maintain output levels.

U.S. crude was down around 0.5 percent, just above the six-year low of $ 42.03 a barrel hit earlier in the week.

(Editing by Catherine Evans)

imageLONDON: Euro zone bond yields kept falling on Wednesday as the European Central Bank hoovered up government debt across the currency union at a rate matching its trillion-euro commitment over 1-1/2 years.

In the first three days of buying by the ECB and the bloc’s national central banks – collectively known as the Eurosystem – traders said orders were tiny and frequent, allowing smaller trading desks to chip in some bonds and widening the pool.

National central banks from the euro zone’s top-rated countries were more active than those rated lower, and the purchases were spread across all the maturities in the 2-to-30 year eligible segment of the market, traders said.

Traders said Italian and Spanish central banks were more active on Wednesday than in the previous two days, as 30-year borrowing costs in both countries fell below 2 percent for the first time.

Mizuho strategist Peter Chatwell said buying these higher-yielding peripheral bonds was the best way for investors to profit from quantitative easing.

“At some point economic data will improve and core yields should rise, whereas periphery will outperform on the way down and in a sell-off.”

Top-rated German 10-year yields, which set the standard for euro zone borrowing costs, fell 3 bps to a new record low of 0.193 percent. Italian and Spanish equivalents were down 9 bps at 1.13 and 1.10 percent. Most other euro zone bond yields were at or close to record lows.

“In the euro area, all government bond yields are approaching the new effective floor, the European Central Bank’s deposit rate of -0.20 percent,” said Markus Allenspach, head of fixed income research at Julius Baer, referring to the ECB’s rule that it cannot buy bonds yielding less than the deposit rate.

“The downtrend of yields is virulent and will continue.”

The main sellers have been the banks that have accumulated inventories of bonds following recent debt sales by governments. But some overseas investors, mainly from the United States, appeared late on Tuesday and were expected again later on Wednesday.

ECB President Mario Draghi said half of the euro zone bonds were held by overseas investors, who would be more likely to sell than the locals, who need to keep hold of the bonds for regulatory reasons.

Traders said the average size of the orders was 15-20 million euros, less than half of that seen at the height of the euro zone debt crisis during the ECB’s first bond-buying scheme, the Securities Markets Programme (SMP).

SCARCITY

ECB policymaker Benoit Coeure said the Eurosystem bought 3.2 billion euros of government bonds on Monday.

“After two days of Eurosystem purchases, it appears that the amounts are close to what we would expect on a daily basis if the ECB is targeting 60 billion euros on a monthly basis, after a slow start early Monday,” Societe Generale strategists said in a note.

“We wouldn’t be surprised if next Monday the Eurosystem has managed to buy 10 billion in cash terms this week,” they said.

Coeure also sought to allay concerns that the ECB would struggle to implement its quantitative easing (QE) programme, saying: “We may face a scarcity of bonds, but we won’t face a shortage.”

That “scarcity” is the main reason why the magnitude of the moves in the bond market took many by surprise.

German 30-year yields fell a further 6 bps on Wednesday to 0.66 percent, below two-year U.S. yields , which were 0.70 percent.

The U.S./German 30-year yield spread has ballooned to 206 bps from 126.6 bps on Jan. 21, the day before the ECB announced its QE plans, according to Reuters data.

“There is an imbalance between demand and supply which keeps pushing yields lower,” BNP Paribas rate strategist Patrick Jacq said.

“That is not surprising. What is surprising is the magnitude of the move. It is a massive, huge move and this is not due to economic fundamentals. This is clearly QE.”

Copyright Reuters, 2015

Euro zone yields wither as ECB's QE gets off to strong start

By Marius Zaharia

LONDON, March 11 (Reuters) – Euro zone bond yields kept falling on Wednesday as the European Central Bank hoovered up government debt across the currency union at a rate matching its trillion-euro commitment over 1-1/2 years.

In the first two days of buying by the ECB and the bloc’s national central banks – collectively known as the Eurosystem – traders said orders were tiny and frequent, allowing smaller trading desks to chip in some bonds and widening the pool.

National central banks from the euro zone’s top rated countries were more active than those in the lower rated ones, and the purchases were spread across all the maturities in the 2-to-30 year eligible segment of the market, traders said.

The main sellers have been the banks that have accumulated inventories of bonds following recent debt sales by governments. But some overseas investors, mainly from the United States, were seen late on Tuesday.

“After two days of Eurosystem purchases, it appears that the amounts are close to what we would expect on a daily basis if the ECB is targeting 60 billion euros on a monthly basis, after a slow start early Monday,” Societe Generale strategists said in a note. “We wouldn’t be surprised if next Monday the Eurosystem has managed to buy 10 billion in cash terms this week.”

German 10-year Bund yields, which set the standard for euro zone borrowing costs, fell to a new record low of 0.199 percent on Monday. Most other euro zone bond yields were at or close to record lows.

Spanish and Italian 10-year yields were down 5-6 basis points at 1.14 percent and 1.17 percent, respectively.

One trader said the average size of the orders was 15-20 million euros, less than half of that seen at the height of the euro zone debt crisis during the ECB’s first bond-buying scheme, the Securities Markets Programme (SMP).

ECB policymaker Benoit Coeure said the Eurosystem bought 3.2 billion euros of government bonds on Monday.

He also sought to allay concerns that the ECB would struggle to implement its quantitative easing programme by saying “we may face a scarcity of bonds, but we won’t face a shortage.”

That “scarcity” is the main reason why the magnitude of the moves in the bond market took many by surprise. Ten-year yields fell 5-9 basis points across the euro zone on Tuesday, while 30-year yields fell 12-14 basis points.

German 30-year yields were down 5 bps on Wednesday at 0.67 percent, less than two-year U.S. yields , which were 0.68 percent.

“There is an imbalance between demand and supply which keeps pushing yields lower,” BNP Paribas rate strategist Patrick Jacq said.

“That is not surprising. What is surprising is the magnitude of the move. It is a massive, huge move and this is not due to economic fundamentals. This is clearly QE.” (Editing by Hugh Lawson)

ECB pledge drives up markets' inflation gauge, German-U.S. yield gap

* Euro 5yr, 5yr forward rate shoots up near 1.80 percent

* U.S./German bond yield gap widest since 1989

* Portugal, Spain, Italy, Ireland yields hit new lows

* U.S. jobs data could raise rate hike chance (Updates prices, adds comment)

By John Geddie

LONDON, March 6 (Reuters) – Euro zone markets’ key inflation gauge shot up on Friday, a sign investors believe ECB bond-buying will succeed in driving up consumer prices, while the gap between U.S. and German borrowing costs reached its widest since 1989.

The five-year, five-year forward breakeven rate , the European Central Bank’s preferred measure of the market’s long-term inflation expectations, was set for its biggest weekly rise in at least 2-1/2 years.

The ECB’s programme of bond purchases with new money, aimed at igniting inflation and growth, starts on Monday.

“We interpret it as a sign of the credibility of (ECB chief) Draghi’s measures,” said Guilhem Savry, investment manager in Unigestion’s Cross Asset Solutions team.

Along with revealing details of the scheme, the ECB forecast on Thursday consumer price growth would rise from zero this year to 1.8 percent in 2017, close to its target of just below 2 percent. The rise in inflation expectations reflects recent more positive euro zone economic data, a rebound in oil prices and the weakening euro, which will make imports more expensive.

The five-year five-year forward, which shows where investors expect 2025 price growth forecasts to be in 2020, rose to 1.798 percent from 1.765 percent on Thursday. It has climbed around 0.15 percent this week — the biggest rise since Reuters started tracking the measure in late 2012.

Euro zone government bond yields fell broadly for a second day. The gap between 10-year German and U.S. bond yields peaked at 1.79 percent in U.S. trading on Thursday, its widest level since May 1989, according to Thomson Reuters’ Datastream. http://link.reuters.com/gyj32w

U.S. jobs data on Friday could harden the case for a near-term interest rate hike, widening the gap further.

It narrowed slightly on Friday to 1.77 percent, with German 10-year yields down 1 basis point at 0.35 percent; U.S. equivalents inched up 1 bps to 2.12 percent.

“The spread can only widen,” KBC strategist Piet Lammens said. “We are coming closer to when the U.S. Federal Reserve will start its tightening cycle, and in Europe we would have just started quantitative easing.”

Portuguese 10-year yields fell 14 basis points to a low of 1.67 percent, while Italian and Spanish equivalents fell 7 bps to lows of 1.26 and 1.18 percent, respectively.

Irish equivalents fell 4 bps to a new record low of 0.84 percent, while all other euro zone bonds were about 2-3 bps lower.

Economists polled by Reuters expect non-farm payrolls to rise by 240,000 in February, slightly down from January’s 257,000 increase.

Analysts said a significant improvement in the unemployment rate or wage growth could raise the chance the Fed will hike rates sooner than expected. The Fed’s next policy meeting is on March 17-18.

(Editing by Louise Ireland)

Contrarians hedge bets as ECB's quantitative easing move next week seen as 'done deal'

By Jamie McGeever

LONDON (Reuters) – Investors are now so confident the European Central Bank will unveil a government bond-buying stimulus next week that some contrarian traders are betting on a broad market shock if it doesn’t.

Failure of the ECB to unveil a quantitative easing programme at its next policy meeting on January 22 could pummel European stocks by lifting the euro exchange rate and government bond yields that have sunk on the stimulus speculation.

Large-scale purchases of government bonds are seen as a key part in the ECB’s fight against deflation and attempts to revive the 19-nation bloc’s sluggish economy. Markets expect QE to come; only the timing remains uncertain.

“In the short term we are cautious. We bought (a) hedging position on all our risk exposure,” said Monica Defend, global head of asset allocation at Pioneer Investments. “We like equities but we are completely hedged.”

Some analysts, such as those at JP Morgan, reckon the recent plunge in oil, has led to a collapse of bond yields and the euro that indicate markets are virtually fully discounting the ECB pulling the trigger next week. Economists at Citi said on Thursday it was “done deal.”

In dropping its cap against the euro on Thursday, the Swiss National Bank may also have been recoiling from having to defend the franc against an ECB euro-printing onslaught.

But there are reasons to believe the ECB may wait a bit longer. Policymakers are far from united behind QE, and Greece holds a general election on Jan. 25 – the outcome of which could determine Greece’s future in the single currency.

Paul Gleeson, chief executive at Arcanum Asset Management, has been buying “puts” due to expire in March on the Euro STOXX 50 and FTSE 100 (.FTSE) at 2,800 and 5,560 points, respectively. These represent bets on the market falling to those levels by March.

The put/call ratio, which measures the amount of negative “put” option bets on the market versus “calls” on the market rising, rose to around 1 for options maturing in February from around 0.6 earlier this week, according to Eurex exchange data.

This reflects how many investors are still banking on QE next week, as they look to hedge against a stock market pullback in the aftermath of the ECB meeting.

Derivatives that bet on future dividends from European companies, meanwhile, have fallen since the start of 2015. This points to falling inflation expectations or rising scepticism that the ECB will act as soon as next week.

EURO FALLS BELOW LAUNCH RATE

There has also been a notable increase in demand for protection from a shock via short-dated currency options that guard against disappointment on Jan. 22.

One-week risk reversals (EURSWRR=) measuring investors’ demand for “put” options expiring on the ECB’s decision show that traders’ extremely bearish stance on the single currency has actually softened.

They have almost fallen by a third in the last 10 days, to -0.8 point in favour of the euro weakening from -1.2 points.

And the gap in euro option prices expiring before Jan. 22 and those expiring just after is unusually high, at around 2 vols, traders said.

“That shows there is an element of surprise and investors are wary. So they are seeking to hedge against any disappointment from the ECB,” said one trader.

The euro has tumbled 15 percent since last summer to a nine-year low, falling below its 1999 launch rate of $ 1.1747 (EUR=).

Currency analysts have consistently lowered their euro forecasts. Goldman Sachs and Deutsche Bank both now predict a fall to parity against the dollar next year. Market bets on further weakness have rarely been bigger.

The euro zone bond market has been no less quick to price in QE as soon as this month, with yields and spreads being crushed.

All German borrowing costs out to five years maturity are negative, and the 10-year yield this week hit a record low 0.40 percent . The yields of “peripheral” countries such as Italy and Spain have also plumbed new lows because if the ECB does do QE, it will likely buy the bonds of these countries as well as “core” countries.

One gauge of QE expectations is the performance of peripheral sovereign bond yields against yields on corporate debt with a similar credit rating.

The gap between the two widened during most of 2014 as government bond yields plunged in anticipation of QE, but has largely stabilized in recent weeks. This suggests at least there’s little fresh impetus for this trade and even a growing sense of scepticism around it.

(Additional reporting by Francesco Canepa, Sudip Kar-Gupta, Anirban Nag Editing by Jeremy Gaunt)

Bond Yields at Records Suggest Limited Declines in 2015

One year ago many investors were forecasting a euro-area recovery and rising bond yields through 2014. Twelve months later they’re asking how much more the European Central Bank can boost the economy and how much further yields can drop.

When the 10-year German bund yield was at 1.84 percent, back on Dec. 16, 2013, analysts predicted the rate would climb to 2.20 percent at the end of this year. Instead it dropped to a record low as did yields from Italy to Ireland amid growing investor speculation that the ECB will overcome opposition from some of its own officials to begin large-scale purchases of government bonds in early 2015.

Monetary policy makers led by Mario Draghi have signaled they may expand stimulus to include quantitative easing after inflation slowed to the weakest in five years. While buying sovereign debt may push euro-area yields even lower, any resultant uptick in inflation and growth may also reduce demand for the region’s safest assets in the longer term.

“Since they’ve already committed so much to it and raised expectations, not delivering could be particularly damaging,” Gianluca Ziglio, executive director of fixed-income research at Sunrise Brokers LLP in London, said in a Dec. 19 telephone interview. “Why should you invest in bunds with yields at 60 basis points if you expect QE to happen and be successful?”

Plunging Yields

Yields across the region plunged to all-time lows this year as the ECB cut its deposit rate below zero for the first time, unveiled an unprecedented program of asset purchases and said an expansion to include government bonds is possible. The average rate on euro-region sovereign debt dropped to 0.8771 percent on Dec. 23, the lowest on record, according to Bank of America Merrill Lynch indexes.

Spain’s 10-year yield dropped to a record 1.644 percent on Dec. 23 from 4.15 percent at year-end. The same day, Italy’s reached 1.911 percent, less than half its 4.13 percent level closing 2013. Portugal’s tumbled to 2.679 percent a day earlier, and Ireland’s scraped 1.262 percent in the previous week.

The plunge in yields has tracked a decline in expectations for the euro-area economy. The region expanded 0.8 percent this year, according to the economists surveyed by Bloomberg, missing the 1 percent growth forecast by analysts in December 2013.

Sell Holdings

“Investors pre-empt what the central bank will do, so they already started to take positions but then as it gets announced they decide to sell their holdings,” Charles St-Arnaud, a London-based economist at Nomura, said in a Dec. 23 interview on Bloomberg Television’s “On The Move” with Guy Johnson. “But then as the ECB start to do the purchases you could see yields again going slightly lower.”

The region’s higher-debt and -deficit nations have been taking advantage of the low-rate environment to refinance. Portugal last month exchanged bonds to extend their maturities, easing the repayments it faces in the next two years after it exited its three-year bailout program in May.

As of Nov. 13 the nation had already raised funding for more than half of its 2015 financing needs, according to Finance Minister Maria Luis Albuquerque. It was the best-performing euro-area debt market this year through Dec. 23, returning 22 percent compared with 13 percent across the region, according to Bloomberg World Bond Indexes.

Yield Forecasts

While the median estimate of analysts surveyed by Bloomberg forecasts 10-year bund yields will climb to 1.1 percent by the end of next year, the implied forward predicts a far more limited advance to 0.73 percent. Implied forwards compare rates over various terms in a technique known as gap analysis.

Benchmark German 10-year yields fell to a record 0.541 percent today after Greece’s Prime Minister Antonis Samaras failed in his final attempt to get his candidate for president confirmed, triggering snap parliamentary elections and boosting demand for the euro area’s safest fixed-income securities.

More than 90 percent of respondents in Bloomberg’s monthly survey, conducted through Dec. 11, predict the ECB will start extended purchases next year, up from 57 percent in November. An announcement will probably come in the first quarter, with any decision taken against the objections of some policy makers, the poll of 55 economists showed. ECB policy makers are set to meet next on policy on Jan. 22.

“You would have to suggest the vast majority of QE effect is priced in” to bund yields, Charles Diebel, head of macro strategy at Aviva Investors which manages about 241 billion pounds ($ 374 billion), said in a Dec. 19 telephone interview. “I find it difficult to build a bullish case for bunds.”

To contact the reporter on this story: Lucy Meakin in London at [email protected]

To contact the editors responsible for this story: Paul Dobson at [email protected] Keith Jenkins

Euro zone yields hit new lows after Fed signals no change for now

* Fed minutes suggest no hurry to hike interest rates

* Euro zone bond yields fall across the board

* ECB’s Draghi in focus for further hints on QE (Updates prices, adds more detail)

By Emelia Sithole-Matarise

LONDON, Oct 9 (Reuters) – Yields on Spanish and a clutch of top-rated euro zone bonds hit record lows on Thursday, after the minutes of the U.S. Federal Reserve’s latest policy meeting suggested it was in no hurry to raise interest rates.

Analysts said the minutes of the mid-September meeting, released on Wednesday, indicated concern about a slowing global economy and the dollar’s strength would keep Fed policy accommodative for now.

Global equities and U.S. Treasuries rallied with yields on shorter-dated notes, which go down as their price rises, falling to their lowest levels since late August.

Euro zone bonds extended this week’s gains, which were fuelled by concern growth is slowing in the region. Grim German industrial data and warnings from the International Monetary Fund led to expectations the European Central Bank would ramp up monetary stimulus. Poor German trade data reinforced those expectations.

Spanish 10-year yields fell 7 basis points to a record low of 2.03 percent. German, French, Austrian and Belgian equivalents also reached record lows

“The FOMC minutes were more dovish than expected with some members expressing increased concern about the slowdown in Europe as well as Japan and China with a couple also hinting at some anxiety about the dollar’s strength,” said Nick Stamenkovic, a strategist at RIA Capital Markets.

“Consequently, the market has pushed out the timing of a rate hike from Q2 to Q3 next year and hence Treasuries rallied, led by the short end and that’s boosted European fixed income markets today.”

GERMAN RECORD

German 10-year yields, the benchmark for euro zone borrowing costs, fell 4 bps to 0.866 percent, breaking a record low of 0.867 percent set in late August. Yields plunged on signs the euro zone’s biggest economy was stuttering as counter-sanctions between Russia and Europe over fighting in Ukraine took a toll.

Italian 10-year yields dipped 6 bps to 2.28 percent, not far from their record low of 2.255 percent set in early September. The move was bolstered by Prime Minister Matteo Renzi’s successful parliamentary confidence vote late on Wednesday, the most important of his eight-month government, on a contentious labour reform proposal.

Markets will scrutinise ECB President Mario Draghi’s presentation in Washington later on Thursday for hints on how soon the central bank could expand its asset purchases – focused for now on covered bonds and asset-back securities – to government bonds, a tool known as quantitative easing (QE).

Record-low inflation expectations and the grim euro zone economic outlook have re-ignited expectations the ECB will have to deliver Fed-style QE in coming quarters.

The last time Draghi spoke in the United States in August, he drew the market’s attention to the decline in the ECB’s preferred measure of market inflation expectations, the five-year, five-year breakeven forward rate. That measure has fallen to a record low of 1.88 percent since the ECB met last week.

“We think the QE timetable is much more accelerated than what the market is pricing here,” said Harvinder Sian, a strategist at RBS.

“You cannot have a central bank head stand up and shout fire on its most crucial component of what it does in terms of its inflation anchoring process and see that go wrong, then don’t expect the central bank to act. We think that the probabilities for a move in the next few months is still very high.” (Editing by Andrew Heavens, Larry King)

German orders slump lifts QE hopes, pushes euro zone yields down

* German factory orders post biggest drop since 2009 in August

* More QE speculation days after ECB meeting disappoints

* French budget discussions are sign of discord at EU level-trader

* Greece, Spain debt lags as political risk simmers (Updates prices, adds context)

By Marius Zaharia and John Geddie

LONDON, Oct 6 (Reuters) – Most euro zone bond yields fell on Monday after data showing German industrial orders dropped at their fastest rate since 2009 in August revived expectations of further monetary easing.

The European Central Bank gave no hints last week that it was in any hurry to take more easing measures, instead giving extra details about plans it announced in September to buy asset backed securities and covered bonds.

But a worsening economic outlook for the euro zone means parts of the market think it is only a matter of time before the ECB starts buying government bonds to pump money into the economy, a measure known as quantitative easing (QE).

German orders fell 5.7 percent on the month, undershooting expectations of a 2.5 percent drop in a Reuters poll.

“The economy is not running at full speed, price pressures will remain very, very low in this environment and this is sparking some QE speculation among some investors,” said Christian Lenk, rate strategist at DZ Bank.

“That’s overriding the fact that Draghi did not explicitly announce more details on possible QE last Thursday.”

The International Monetary Fund (IMF) will cut its estimates for German growth in 2014 and 2015 to about 1.5 percent for each year because of the crises in Ukraine and the Middle East, German magazine Der Spiegel said on Sunday.

German 10-year Bund yields, the benchmark for euro zone borrowing costs, fell 3 basis points to 0.91 percent – just 4 bps away from their record lows. They had touched 0.95 percent after the ECB meeting.

Other euro zone yields fell 1-4 bps, with political jitters leaving Spanish and Greek debt trailing, in what strategists said was a light session in terms of trading volumes.

Portugal’s 10-year bonds were the best performers on the day, with yields some 4 bps lower at 3.04 percent.

“I’ve always been quite sceptical about QE,” said Elwin de Groot, senior market economist at Rabobank.

“But looking at these data now and the dynamics that we’ve seen over the past couple of months, they are pointing to a scenario where QE will be invoked at some point.”

UNDER THE SURFACE

For other market participants QE remains a more distant prospect. They note the measure is opposed by Germany and say it will take a serious deflation scare to get everybody on board.

One trader pointed to reports saying the European Commission is likely to reject France’s push for a higher budget deficit in 2015 as a sign of tensions between policymakers.

“There’s a lot of conflict underneath the surface and it make you think that QE is questionable,” the trader said.

A French presidential official said Paris does not expect its 2015 budget bill to be rejected at European Union level.

The perceived rise QE expectations also did little to stem the recent sell off in Greek debt. Ten-year yields were some 10 bps higher on the day at 6.48 percent.

The Greek government, which is due to hold a confidence vote this week, unveiled its 2015 budget on Monday which outlined plans to issue seven- and 10-year bonds in the months ahead.

Investors are worried that the country’s eagerness to replace the strict conditions of its bailout aid with private funding could torpedo its chances of future debt relief.

Spanish debt also languished as polls showed support for Spain’s ruling conservatives had sunk to its lowest level since its election victory in 2011.

Ten-year yields rose 2 bps to 2.14 percent, as voters and investors continue to worry about separatist rumblings in the country’s well-off Catalonia region.

(Reporting by Marius Zaharia and John Geddie; Editing by Tom Heneghan)

German orders slump pushes euro zone yields lower

* German factory orders post biggest drop since 2009 in August

* More QE speculation days after ECB meeting disappoints

* French budget discussions are sign of discord at EU level-trader (Updates prices, adds fresh quote)

By Marius Zaharia

LONDON, Oct 6 (Reuters) – Euro zone bond yields fell on Monday after data showing German industrial orders dropped at their fastest rate since 2009 in August revived expectations of further monetary easing.

The European Central Bank gave no hints last week that it was in any hurry to take more easing measures, instead giving extra details about plans it announced in September to buy asset backed securities and covered bonds.

But a worsening economic outlook for the euro zone means parts of the market think it is only a matter of time before the ECB starts buying government bonds to pump money into the economy, a measure known as quantitative easing (QE).

German orders fell 5.7 percent on the month, undershooting expectations of a 2.5 percent drop in a Reuters poll.

“The economy is not running at full speed, price pressures will remain very, very low in this environment and this is sparking some QE speculation among some investors,” said Christian Lenk, rate strategist at DZ Bank.

“That’s overriding the fact that Draghi did not explicitly announce more details on possible QE last Thursday.”

German 10-year Bund yields, the benchmark for euro zone borrowing costs, fell 2 basis points to 0.91 percent – just 4 bps away from their record lows. They had touched 0.95 percent after the ECB meeting.

Other euro zone bond yields fell 1-5 basis points, with Spanish 10-year yields at 2.11 percent and their Italian equivalent at 2.31 percent.

“I’ve always been quite sceptical about QE,” said Elwin de Groot, senior market economist at Rabobank.

“But looking at these data now and the dynamics that we’ve seen over the past couple of months, they are pointing to a scenario where QE will be invoked at some point.”

For other market participants QE remains a more distant prospect. They note the measure is opposed by Germany and say it will take a serious deflation scare to get everybody on board.

One trader pointed to reports saying the European Commission is likely to reject France’s push for a higher budget deficit in 2015 as a sign of big differences between policymakers.

“There’s a lot of conflict underneath the surface and it make you think that QE is questionable,” the trader said.

A French presidential official said Paris does not expect its 2015 budget bill to be rejected at European Union level.

In money markets, the overnight bank-to-bank Eonia lending rate settled at a new record low of minus 0.045 percent.

(Reporting by Marius Zaharia, editing by John Stonestreet)