January 24, 2019 / 8:13 AM / 5 months ago

Euro zone yields dip as markets await the comforting hand of the ECB

* ECB meeting due, markets hope for dovish tilt

* Such a move would push out rate hike expectations

* French, German PMIs to precede meeting

* Italian two-year yields dip on LTRO hopes

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

By Abhinav Ramnarayan

LONDON, Jan 24 (Reuters) - Euro zone government bond yields fell on Thursday, before business surveys for France and Germany and a European Central Bank meeting the may respond to slowing economic growth with dovish comments.

A day after the Bank of Japan signalled that stimulus is here to stay, many were hoping the ECB will also acknowledge slowing growth by changing the language in its statement; some believe that will come only in March.

A change in the statement would not be a change in policy, but it would signal that the ECB is proceeding even more cautiously in withdrawing years of stimulus.

“We think the ECB might be changing its tone a little bit from saying the risks to the growth outlook are broadly balanced to saying the risks to the growth outlook are tilted to the downside,” said Wouter Sturkenboom, chief investment strategist for EMEA and APAC, Northern Trust Asset Management.

“This will push out ECB rate hike expectations even further which will keep a lid on yields to the downside as well,” he said.

Money market pricing suggests investors are pricing in only about a 45 percent chance the ECB will raise rates this year.

Euro zone bond yields fell 1 to 2 basis points, with German 10-year yields — the benchmark for the region — down a basis point to 0.21 percent, a one-week low. French 10-year yields were also down, by about 1.5 bps to 0.616 percent.

A key market gauge of euro zone inflation expectations, the five-year five-year forward inflation swap, was close to a six-month low at 1.538 percent.

The United Kingdom, facing its worst political crisis since World War Two, is due to leave the European Union at 2300 GMT on March 29 but has no agreement on the terms of its departure.

Meanwhile, France is due to release preliminary purchasing managers’ index (PMI) data at 0815 GMT, German at 0830 GMT, and the euro zone at 0900 GMT.

Reuters polls show the PMIs are expected to hover around the 50 mark that separates contraction from expansion.

CHEAP LOANS

Market analysts also believe ECB President Mario Draghi may hint at cheap loans to banks, under a programme known as the long term refinancing operation (LTRO).

That would help short-dated southern European government bond yields. Banks in the region are most likely to make use of LTROs and ramp up purchases of short-dated debt of their governments, a popular trade the last time LTRO was used.

Italy’s two-year bond yield was an outperformer, with yields dropping 3 bps to 0.33 percent, close to the over six-month low hit last week. (Reporting by Abhinav Ramnarayan, editing by Larry King)

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