ECB replaces North Korea in euro zone bond market spotlight

Government bond yields in the euro area crept up on Tuesday as attention moved away from tensions over North Korea to an approaching European Central Bank meeting that could shed light on the timing for an unwinding of massive monetary stimulus.

The renewed tensions over North Korea have bolstered demand for safe bonds in recent weeks, with a nuclear test at the weekend lending further support to fixed income on Monday.

But the bond market impact from the latest test has proved limited.

That in part, say analysts, suggests markets have become used to "sabre rattling" from North Korea and some caution against piling into bonds heavily before Thursday`s ECB meeting.

"The ECB meeting is still the key risk event for the week and the impact of geopolitics is fading," said Commerzbank rates strategist Rainer Guntermann.

"A consensus has settled on the view that the ECB will indicate the exit is coming at some point but refrain from giving details."

While the central bank is not expected to signal a scaling back of its 2.3 trillion euro bond-buying scheme in September, what the bank says about a strong euro and the impact that has on the outlook for inflation are likely to come under scrutiny.

The ECB is widely expected to start winding down its stimulus given a stronger economic outlook and a scarcity of eligible bonds for the programme.

Data released on Monday showed the ECB bought fewer German bonds in August than in any month since the start of the stimulus programme, suggesting it was holding back to avoid running out of debt to buy.

However, the ECB`s exit from quantitative easing has been complicated by a strong euro, which dampens inflation by lowering the cost of imported goods.

The common currency is up around 14 percent against the dollar this year.

Most euro zone bond yields were up 1-2 basis points early on Tuesday.

Bond yields across the bloc also faced upward pressure from a pick up in supply this week after a summer lull.

Investors typically push bond prices down, and yields up, to make way for new supply. Austria will issue 1.38 billion euros of long-dated debt later on Tuesday.

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