LONDON (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 euro zone inflation expectations on Wednesday hit a 7-week high just around 1.71 percent EUIL5YF5Y=R, 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.
ECB to kick off rate hikes in mid-2019: tmsnrt.rs/2HKfMx2
Euro zone bond yields fell 1-2 basis points in early trade as U.S. bond yields pulled back from multi-year highs.
Germany’s benchmark 10-year bond yield fell 2 bps to 0.617 percent, after reaching a six-week high of 0.655 percent on Tuesday DE10YT=RR.
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 a steady U.S. economic expansion, accelerating inflation and concerns about increasing debt supply. It last stood at 3.031 percent.
Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr
Reporting by Fanny Potkin and Dhara Ranasinghe; Editing by Matthew Mpoke Bigg