* Market seen treading water before Thursday's ECB meeting
* Top-rated euro zone 2-year yields stay negative
* Irish 2-year yields close to zero
By Emelia Sithole-Matarise
LONDON, Sept 2 Euro zone government bond yields
nudged up on Tuesday as investors paused for breath after the
market's sharp rally, with moves seen limited before an ECB
meeting this week that could further ease monetary policy.
Investors were also wary of pushing yields any lower before
U.S. economic reports that many expect to show the recovery in
the world's biggest economy remains on track, in contrast to the
grim outlook in Europe.
Euro zone bond yields stayed within sight of historic lows
after anaemic manufacturing data from the currency bloc
reinforced bets the European Central Bank will deliver more
stimulus for a stuttering economy at its meeting on Thursday.
"If the ECB delivers, the market would rally slightly, if
not there could be a decent setback not only at the front end
(shorter-dated bond yields) but also in the spreads. But going
into the Thursday there will be little movement," said Patrick
Jacq, a strategist at BNP Paribas in Paris.
Yields on 10-year Italian, Spanish and Portuguese bonds were
2 basis points up at 2.45 percent, 2.28
and 3.22 percent respectively as
were those on German Bunds, the benchmark for euro zone
borrowing costs, at 0.90 percent.
The German 10-year yields are just off record
lows of 0.867 percent hit last week, with the conflict in
Ukraine supporting demand for safe haven assets.
Two-year yields on top-rated euro zone bonds remained firmly
in negative territory ahead of the ECB meeting, with Irish
equivalents flirting near zero percent, a sharp
turnaround in the fortunes of a country that only exited an
international bailout late last year.
Banks including JP Morgan, Nomura and RBS are urging the ECB
to cut interest rates this week, with some expecting Draghi to
lower the charges on the emergency loans (TLTROs) that will be
made available to banks for the first time this month.
Dovish comments by ECB President Mario Draghi in late August
sparked market bets that the centrla bank is preparing to pump
more liquidity into the system, possibly via a broad-based
quantitative easing (QE) asset purchase programme.
Sources from within the central bank told Reuters last week
that new action on Thursday was unlikely but not impossible, and
that the barrier to QE was still "very high".
While most market participants do not expect the ECB to take
major easing steps this week, further measures are considered a
matter of when and not if in the face of risks to euro zone
growth posed by low inflation as well as the Ukraine conflict.
"People in the market have learned from the events of the
past few years, we've had two instances when there was a lot of
pressure on the ECB and people thought they won't deliver but
they did," Lombard Odier global fixed income strategist Salman
"Now the market has learned that if pushed the ECB will
deliver. It's created a reaction function. The market is front
running Draghi and it can continue until QE actually happens."
(Editing by Alison Williams)