March 6, 2017 / 9:06 AM / 7 months ago

From politics to policy: bond markets count down to ECB

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

By Dhara Ranasinghe

LONDON, March 6 (Reuters) - Euro zone government bond yields edged down on Monday, as a perception that the ECB will resist calls to start unwinding its ultra-loose monetary policy this week brought some comfort to markets that are bracing for an imminent U.S. rate hike.

The European Central Bank meets on Thursday and is not expected to make any changes to its monetary policy, highlighting a divergence with the United States, where comments in the past week from Federal Reserve officials have seen expectations for a March rate hike ratchet higher.

Comments from Fed chief Janet Yellen on Friday cemented the view that the Fed will raise interest rates at its next meeting on March 14-15.

The ECB faces a balancing act between signalling that it will keep monetary policy stimulus in place as contentious Dutch and French elections loom, while at the same time acknowledging stronger economic growth in the region and higher inflation.

Data last week showed inflation in the 19-member euro zone rose to 2 percent in February, zooming past the ECB’s inflation target of close to but below 2 percent.

Investors will be watching ECB President Mario Draghi for any change in his forward guidance, paying attention to whether he will drop the reference to keeping interest rates at their “present or lower levels for an extended period of time”.

“There is a remaining risk that on the rates guidance, the ECB becomes a little less dovish,” said Commerzbank rates strategist Rainer Guntermann.

“The news flow on inflation has certainly been positive, but on the other hand there are risks in the euro zone so it’s probably too early to say there will be a consensus on the need for policy tweaks.”

Most euro zone bond yields were a touch lower in early Monday trade, with Germany’s benchmark 10-year Bund yield 3 basis points lower at 0.33 percent and moving away from a two-week high hit on Friday.

It also drew support from a tumble in German stocks as Deutsche Bank shares slumped after the German heavyweight lender unveiled an 8 billion euro cash call.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets

Against a backdrop of stronger euro zone data and talk of another U.S. rate rise soon, money markets price in around a 60 percent chance that the ECB will hike its deposit rate by 10 basis points early next year.

A tapering of the ECB’s bond buying stimulus is seen as a key risk for government bond markets, although analysts say talk of policy loosening is still premature.

“If I were the ECB and I wanted to taper next year I would keep forward guidance regarding rates in place to avoid a strong selloff in bonds,” said Martin van Vliet, a senior rates strategist at ING.

Editing by Catherine Evans

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