Euro zone bond yields rose on Tuesday with some of the investors who rode the wave of growing expectations of further European Central Bank monetary policy easing taking a cautious step back before the meeting on Thursday.

With markets already pricing in a deposit rate cut and an increase in the size, scope and length of the trillion-euro bond buying programme, analysts say it would be hard for ECB President Mario Draghi to surprise markets.

German 10-year Bund yields, the benchmark for euro zone borrowing costs, were up 2 basis points at just below 0.50 percent. Their high-to-low move in November was almost 30 basis points.

"The big question is if Draghi can surprise the markets, given that the ECB by its own comments has contributed to quite stretched market expectations," said SEB head of fixed income research Jussi Hiljanen.

"If you managed to catch the recent decline in yields, year end is approaching so you definitely want to decrease risk at these levels."

Hiljanen said yields were at levels where investors would rather look to sell than to buy, especially as the U.S. Federal Reserve is readying its first interest rate hike in a decade in a move which could put upward pressure on yields globally.

The divergence between the two central banks was clearly shown in financial markets. The gap between benchmark two-year U.S. and euro zone yields was its widest since 2006 and the dollar's value against a basket of currencies is close to a peak not seen since 2003.

Most euro zone yields were 1-3 basis points higher.

With a comprehensive easing package already considered to be a done deal, confidence the measures might be useful to lift inflation was growing as well.

The ECB's preferred gauge of the market's long-term inflation expectations - the five-year, five-year breakeven forward - traded at three week highs as the market is confident a comprehensive easing package is on its way.

The measure of where markets expect 2025 inflation forecasts to be in 2020 was last quoted just below 1.80 percent, the highest since Nov. 10. ECB easing expectations helped it bounce off lows of about 1.56 percent hit at the end of September.

While the outlook is getting brighter, for now inflation remains stubbornly close to zero.

Euro zone inflation data for November, out at 1000 GMT, is expected to show a 0.2 percent annual rise. German consumer prices, harmonised to compare with other European countries, rose by 0.3 percent on the year in November, as expected. (Reuters)

Source: www.businessworld.ie