* Italian, Spanish yields extend falls
* ECB outlook offsets unease over Italy's political tensions
* German, French, Dutch and Austrian bonds also firm
By Emelia Sithole-Matarise
LONDON, Nov 4 Euro zone government bonds mostly
pushed higher on Monday, underpinned by expectations the
European Central Bank could signal further monetary policy
easing at its meeting this week.
Both core and lower-rated euro zone bonds have rallied over
the past week after plunging euro zone inflation firmed up
market bets the ECB will be forced to ease policy further in
The policy outlook is offsetting concerns about political
tensions in Italy before a Senate vote on whether to expel
former premier Silvio Berlusconi from parliament after a tax
Italian 10-year yields fell 4 basis points to 4.08 percent
while equivalent Spanish yields were 5 bps down at
"Clearly market expectations turned recently in favour of a
potential (ECB) rate cut, probably not this week but there's a
high probability it could be delivered in December," said
Patrick Jacq, a strategist at BNP Paribas in Paris.
"To some extent as the ECB is seen very dovish this is
offering support for the periphery."
The ECB has not officially signalled any imminent easing
since its October meeting and it is unclear going into
Thursday's meeting whether it would opt to cut rates or prefer
to give banks a fresh injection of cheap long-term loans.
In core markets, the German Bund future was 10
ticks up at 141.95, having hit two-month highs at 142.32 last
Thursday. Cash 10-year Bund yields were 1 basis
point lower at 1.68 percent while Dutch, French and Austrian
yields also dipped.
Some in the market like Commerzbank strategists urged
caution going into the ECB meeting, saying there was a risk the
market may be disappointed.
"We still see the risk that the ECB may struggle to live up
to the increasing expectations for additional stimulus measures
as the ECB may not share the sense of urgency to act," they said
in a note.
"Unintended side effects from negative interest rates or
LTROs (long-term loans) may be too high a hurdle. A dovish
wording from Draghi is ensured but no action this week is still
likely to see rates markets souring."
Traders will also keep a close eye on final readings of euro
zone business surveys for October later in the session for hints
about the market's near-term direction.