* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr
By Dhara Ranasinghe
LONDON, March 6 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)