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Euro zone bonds steady as investors look to ECB for stimulus clues

Thu, 10th Sep 2020 08:25

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

By Dhara Ranasinghe

LONDON, Sept 10 (Reuters) - Germany's benchmark Bund yield
held above two-week lows on Thursday, before a European Central
Bank meeting that investors suspect could signal more stimulus
given weak inflation and a strong euro.

Most 10-year bond yields in the euro area were little
changed with calm in markets expected to prevail ahead of the
ECB policy decision at 1145 GMT and news conference at 1230 GMT.

Having acted aggressively in recent months to protect the
economy from the coronavirus shock, the ECB is not expected to
take any major policy action.

But inflation has turned negative and a strong euro, which
adds to downward pressure on prices, has raised concern about
long-term price growth that could force the ECB to act again
soon.

The euro has firmed 8% against the dollar since the spring
and more than 4% against a basket of currencies weighted by the
bloc's foreign trade.

"I don't think the move in the euro has been sufficiently
big to be a real concern but it's just against the backdrop of
everything else that is happening that means it's not
particularly welcome news," said Anatoli Annenkov, senior
European economist at Societe Generale.

He expects the ECB's emergency bond buying programme to be
extended and expanded by a further 500 billion euros in October
or December.

Germany's 10-year bond yield was little changed on the day
at -0.46%, holding above two-week lows hit the
previous session around -0.51%.

Italian bond yields were broadly steady with the
closely-watched Italian/German 10-year bond yield gap hovering
at 153 basis points -- almost 20 bps tighter than
where it traded at the time of the ECB's July meeting.

The ECB's growth and inflation projections to be published
later in the day will only show slight changes compared with the
bank's June forecasts, Bloomberg reported on Wednesday.

Brian Coulton, chief economist Fitch Ratings said that the
ECB's aggressive policy action this year had helped boost
inflation expectations and that deflation in the single-currency
bloc should be avoided.

"While we don't think they (the ECB) will hit their target,
we do think they will manage to avoid outright deflation," he
told an online conference on Wednesday.

The ECB has undershot its near 2% inflation target for the
past seven years.

(Reporting by Dhara Ranasinghe; editing by Emelia
Sithole-Matarise)

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