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Bond markets calm before ECB meets, analysts see scope for disappointment

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

AMSTERDAM, Oct 29 (Reuters) - German bond yields held near seven-month lows on Thursday as markets stabilized after lockdowns in France and Germany hit risk assets, but analysts saw a threat of market disappointment from the European Central Bank meeting later in the day.

France and Germany ordered their countries back into lockdown on Wednesday, causing a sell-off across world stock markets, which also hit Italian government bonds.

Germany’s 10-year yield was up 1 basis point early Thursday at -0.62%, still near its lowest since March at -0.646%, which it reached on Wednesday. Italian 10-year bond yields rose 1 basis point to 0.78%

Greek bonds, rated junk and only eligible for ECB emergency bond buying, were the exception. The 10-year yield rose to its highest in nearly a month at 1.084%..

Most market participants expect no change in policy at the ECB meeting, but they will be watching the central bank’s messaging closely, looking for signs it’s likely to expand its pandemic emergency bond-buying programme, which most investors expect in December.

The lockdowns announced in recent days and their impact on riskier assets mean expectations for some kind of pre-commitment from the ECB have risen in recent days, according to Piet Christiansen, chief analyst at Danske Bank.

The risk is markets will be disappointed, Christiansen said, since the ECB is likely to continue watching incoming data and its governing council is divided between hawkish and dovish policymakers.

Short of an actual announcement of new measures, it was hard “to imagine what kind of message she (ECB President Christine Lagarde) can deliver that she can stop the beginning of a further spread widening,” said Daniel Lenz, a rates strategist at DZ Bank in Frankfurt.

The spread between Italian and German 10-year bond yields -- effectively the risk premium on Italian debt -- was at its widest in a month at 140 bps on Thursday.

Still, any disappointment should be limited, Commerzbank analysts Cem Keltek and Michael Leister said, given the rise in the Italian risk premium has been limited compared with losses on stocks.

“Risk-off on ECB inaction would probably trigger only muted flight-to-safety judging by yesterday’s price action,” they said.

Reporting by Yoruk Bahceli

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