March 6, 2019 / 11:12 AM / 3 months ago

UPDATE 1-Pre-ECB caution pushes German bond yields to one-week low

* EZ bond yields edge down across board

* Caution sets in before ECB meeting

* Doubts over Brexit talks also lift demand for fixed income

* Euro zone periphery govt bond yields (Updates prices, adds comment)

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.

In benchmark issuer Germany, two-year bond yields rose to one-year highs on Tuesday and 10-year bond yields last week notched up their biggest weekly jump since October.

However, with Thursday’s ECB meeting looming and some doubts about progress in Britain’s talks to leave the European Union, there was some support for fixed income 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 is 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.”

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 a tad lower at minus 0.51 percent, off Tuesday’s one-year highs at minus 0.495 percent.

Broader euro zone 10-year bond yields fell 1 to 2 bps.

Alexander Aldinger, rates strategist at Bayerische Landesbank, said bond yields were likely to head higher once the ECB meeting was out of the way.

“We should find a bottom in terms of the economic data,” he said. “Most important is Brexit and US/China trade talks and a resolution there would be the final boost for yields to go higher.”

Thursday’s meeting is shaping up as a day of reckoning for the ECB. It has downplayed the global 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 and Susan Fenton

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