Euro zone sovereign bond yields soared and the euro dipped on Thursday after the European Central Bank said it plans to end its bond buying programme in the third quarter in a surprise move.

Bond yields in Italy, a key beneficiary of the ECB's bond buying stimulus, surged over 20 basis points and German bond yields surged to three-week highs -- more than unwinding falls since Russia's Feb.24 invasion of Ukraine.

Europe's single currency rose initially, but that proved short-lived, and stock markets remained deep in the red.

The move came as a surprise as investors had not anticipated any big policy announcements given the uncertainty unleashed by the war in Ukraine.

The ECB said purchases during the third quarter under the conventional Asset Purchase Programme (APP), would be smaller than previously planned and would end in the third quarter depending on economic data.

The bank raised its inflation projections while cutting its growth outlook given the rise in commodity prices.

The ECB noted that adjustments in interest rates will take "some time" after bond purchases end and would be "gradual."

Germany's two-year yield, sensitive to interest rate expectations, rose more than 17 bps to -0.35% as traders ramped up bets on ECB rate hikes.

Germany's five-year bond yield turned positive for the first time since Feb 28, and 10-year yields rose as much as 10 bps to 0.30%, the highest since Feb 16.

Euro zone money markets moved to price in 45 bps of ECB hikes by December, versus 35 bps before the ECB decision and brought forward bets on a first, 10 basis-point hike to July, compared with September before the decision.

"The fact that tapering is proceeding apace is a sign that the bar is high for the ECB to put normalisation off," said Antoine Bouvet, senior rates strategist at ING, adding that ECB forecasts are consistent with the bank's policy rate rising to 0% next year from -0.50% currently.


The most eye-popping moves were in Italy, where two-year yields were last up 21 bps at 0.19%. They had been as low as -0.05% earlier on Thursday.

The closely-watched gap between Italian and German 10-year yields, effectively the risk premium on Italian debt, rose to as high as 162 bps from around 150 bps before the meeting.

"Rates are right to jump, and in particular in the periphery where the (spread) tightening seen since the start of the war in Ukraine was premised on delayed ECB normalisation," Bouvet said.

"This assumption has been proven wrong, we're back on a widening path."

A key market gauge of long-term euro zone inflation expectations dropped sharply after the decision, to as low as 2.05% from nearly 2.16% earlier on Thursday.

"For the time being (the ECB) are choosing to look through some of the uncertainty created by the war. The more immediate impact will be the rise on inflation and we could get inflation above 6%, which means the risks of entrenched inflation expectations," said Marchel Alexandrovich, European economist at Saltmarsh Economics.

The euro rebounded more than half a percent after the ECB statement, but slipped back. It was last down 0.5% at $1.10.

Euro zone stocks fell to fresh session lows following the ECB statement and were down 1.7%, while a gauge of the bloc's banking stocks was 2.25% lower.