UPDATE 1-Euro zone bond yields slip as ECB starts bond purchases, Fed awaited

Germany's benchmark 10-year bond yield fell slightly on Wednesday to below a recent three-month high, as the European Central Bank resumed its asset-purchase program and investors awaited the outcome of a U.S. Federal Reserve meeting.

Bond yields across the eurozone 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 support 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 a market impact, not the flow effect," said Daniel Lenz, rates strategist at DZ bank. The ECB holds over 2 trillion euros worth of bonds, which has put significant downward pressure on yields since the original quantitative easing program was launched in 2015.

Its new round of asset purchases is expected to support bonds, although analysts say the overall impact this time will be limited. ECB purchasing "may have some impact [on Wednesday] if there were some larger tickets during especially this morning. Usually, central banks come up with their orders before mid-day," Lenz said.

The short-term impact would be limited, he added. Wednesday also sees the ECB's introduction of tiered rates, to help mitigate the effect of negative interest rates on banks.

Eurozone bond yields across most maturities rose as much as 2 basis points in early trade - possibly boosted by Spanish inflation data which came in marginally above expectations - before falling back again. Germany's 10-year bond yield was last down around 1 basis point at -0.3670%, near 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.

Data from the German state of Saxony showed consumer prices rose by 1% year-on-year in October. A nationwide inflation report is expected later on Wednesday. But the bigger focus for markets was the Fed, which concludes a two-day meeting on Wednesday. A rate cut is widely expected, but attention will be focused 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. Elsewhere, Greece sold six-month T-bills at a 0.00% yield, pushing down borrowing costs 10 bps compared to a previous sale in October.

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. Italy sold 6.25 billion euros of five and 10-year nominal BTP bonds, paying a three-month high yield.

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