April 26, 2018 / 10:12 AM / a year ago

UPDATE 2-Euro zone bond yields inch down ahead of ECB meeting

* Euro zone bond yields nudge lower

* ECB Rate decision 1145 GMT, press conference at 1230 GMT

* ECB policy seen unchanged by analyst

* Gauge of long-term euro zone inflation hits 8-week high

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates with Italian politics)

By Fanny Potkin and Dhara Ranasinghe

LONDON, April 26 (Reuters) - Euro zone government borrowing costs inched down on Thursday as investors wait to see whether the European Central Bank will offer any clues on the timing and pace of unwinding its ultra-easy monetary stimulus.

The ECB is set to keep policy unchanged at a meeting on Thursday but its comments will be followed closely for further guidance as to when it might signal a move towards ending its 2.55 trillion ($3.16 trillion) asset purchase scheme later this year.

ECB chief Mario Draghi will have to contend with a slew of data showing recent weakness in the euro zone economy that has prompted investors to push back expectations for a rate rise further into 2019.

“The market is expecting Draghi to focus on the softer data, concerns about further strength in the euro and geopolitical factors such as trade wars,” said Orlando Green, European fixed income strategist at Credit Agricole in London.

“The risk is that he is less dovish than expected. There are factors to consider on the hawkish side such as lending appetite by banks, which has picked up.”

A key market gauge of long-term inflation expectations in the euro zone rose to its highest level in 8 weeks on Thursday, at 1.718 percent, showing that investors’ views on the inflation outlook have changed since the ECB’s last meeting.

With the bond-buying scheme due to expire in September, the ECB will have to decide in June or July whether to extend purchases or wind them down. And with the risk of a global trade war still looming, it may not decide until absolutely necessary, so retaining the flexibility to adjust policy.

Money-market pricing suggests that investors expect the ECB to deliver its first hike in this economic cycle by June 2019, having pushed back expectations from early next year. tmsnrt.rs/2HKfMx2

Euro zone bond yields fell 1-3 basis points in midday trade as U.S. bond yields pulled back from multi-year highs.

Germany’s benchmark 10-year bond yield fell 2.4 bps to 0.613 percent after reaching a six-week high of 0.655 percent on Tuesday. It was on track for its biggest fall in 3 weeks.

Euro zone debt yields have been dragged up this week by a rise in U.S yields. The yield on the U.S. 10-year Treasury jumped to a four-year peak of 3.035 percent on Wednesday, its highest since January 2014 US10YT-=RR.

The Treasury yield has climbed on expectations of steady U.S. economic expansion, accelerating inflation and concerns about increasing debt supply.

Elsewhere, Italian debt outperformed after the leader of Italy’s centre-left Democratic Party (PD) said the PD’s top brass would meet on May 3 to discuss whether to enter into talks with the anti-establishment 5-Star Movement on potentially forming a coalition together.

The premium that investors demand to hold 10-year Italian bonds over top-rated Germany tightened to 112.6 basis points on the news, before widening slightly to 113 basis points, .

Reporting by Fanny Potkin and Dhara Ranasinghe; Editing by Mark Heinrich

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