March 6, 2019 / 8:17 AM / 3 months ago

Pre-ECB caution pushes German bond yields to one-week low

* EZ bond yields down 2 bps across board

* Caution sets in before ECB meeting

* Doubts over Brexit talks also lift demand for fixed income

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

By Dhara Ranasinghe

LONDON, March 6 (Reuters) - Germany’s long-dated bond yields fell on Wednesday to their lowest in a week, as markets grew cautious a day before the European Central Bank meets.

The past week has seen selling across major government bond markets as investors dial back their worst fears on the economic outlook and the biggest political risks.

But some doubts about progress in Britain’s talks to leave the European Union and the ECB meeting appeared to support demand for top-rated government debt on Wednesday.

Talks between British Prime Minister Theresa May’s top government lawyer and EU negotiators ended with no agreement on Tuesday. Britain wants concessions on Brexit, three weeks before it’s due to leave the EU, on March 29.

“In the last few days, markets have generally been optimistic about the bigger issues such as Brexit and trade talks,” said DZ Bank rates strategist Christian Lenk.

“Overnight there were some reports doubting the success of that Brexit progress. It’s also usual that people move to the sidelines ahead of the ECB.”

Germany’s 10-year bond yield fell as much as 3 basis points to a one-week low around 0.13 percent. Two-year bond yields were lower at minus 0.51 percent, after reaching one-year highs a day before at minus 0.495 percent.

Across the euro zone, 10-year yields were 1 to 2 bps lower on the day.

Thursday’s meeting is shaping up as a day of reckoning for the ECB. It has downplayed the global economic slowdown for months and is finally expected to take a tentative step to shore up growth by signalling fresh stimulus to keep banks lending.

For investors, a failure to at least signal that a fresh round of cheap bank loans is on its way would probably be met with disappointment and a sell-off in Italy and Spain, countries that have benefited the most from bank lending stimulus.

“A lot of their (ECB) ammunition is spent right now, so it is important that we get a bit more detail on the level of discussion they’ve had on TLTROs,” said Rabbani Wahhab, senior fixed income fund manager at London and Capital.

Reporting by Dhara Ranasinghe, editing by Larry King

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