German bond yields hit near three-week low

German bond yields fell to their lowest level in almost three weeks on Friday after a Reuters report that European Central Bank policymakers had broadly agreed to extend their bond-buying scheme into next year while scaling it back. Disappointing US inflation data sparked further price gains in the afternoon session, pushing yields across the bloc to fresh lows.
But the primary focus in Europe remained on the ECB. ECB ratesetters are moving towards announcing more asset purchases at lower volumes at their October policy meeting, with views converging on a further nine months, five people with direct knowledge of the discussion told Reuters.
The consensus among analysts and economists has been for the ECB to extend the 2.3-trillion-euro scheme into 2018, but with little clarity on the duration. Nine months would be at the higher end of expectations. "Most forecasts were for an extension of between six to nine months but it makes sense to keep the purchases in place for as long as possible to help reduce market volatility and reinforce the rates guidance," ING strategist Benjamin Schroeder said.
Germany's 10-year government bond yield fell more than 3 basis points to as low as 0.40 percent. It was set to end the week 4 bps lower, on track for its biggest one-week fall since early September. ECB President Mario Draghi late on Thursday defended a promise to keep interest rates at rock bottom, batting back German calls for a speedy exit from years of easy money.
"A gradual approach to tapering, without a long, pre-committed period through which the purchases are intended to continue, allows for a re-evaluation and another recalibration a few months later, depending on the markets' initial reaction," Rabobank said in a note. Most euro zone bond yields were 3-6 bps lower on the day.
They extended falls on data showing US consumer prices recorded their biggest increase in eight months in September as gasoline prices soared in the wake of hurricane-related production disruptions, but underlying inflation remained muted. "It is the inflation story that matters right now, it doesn't matter how strong growth is if there's no life in the price data," said Chris Scicluna, head of economic research at Daiwa Capital Markets. Elsewhere, there was a slight underperformance of Austrian government bond yields, down 3 bps at 0.60 percent, ahead of national elections on Sunday.