* ECB expected to reinforce its soft monetary policy stance
* Jackson Hole speech increases QE expectations
* Negative money market rates suggest rate cut bets
By Marius Zaharia
LONDON, Sept 4 Euro zone bond yields dipped on
Thursday as the European Central Bank was expected to reinforce
its message that it was ready to use all its tools, including
bond-buying, to support the economy and lift inflation.
But uncertainty over what the ECB would deliver at its
meeting and how committed to further easing would President
Mario Draghi be in his speech was high.
He told a central bank conference in Jackson Hole, Wyoming,
two weeks ago that financial market expectations of inflation
were falling significantly and that the ECB will use all its
available instruments to ensure price stability.
Those comments increased expectations of a large-scale bond
buying programme - known as quantitative easing, or QE - and
pushed bond yields to record lows in most euro zone countries.
Since then, the market has somewhat pared those
expectations, with Germany believed to still be reluctant to go
down that route, and some analysts expect him to be less
aggressive than at Jackson Hole.
Nevertheless, some analysts expect the ECB to cut rates or
to make its upcoming long-term loans to banks more attractive,
while others expect it to announce a smaller-scale programme of
buying asset-backed securities to spur lending in the euro zone.
Such expectations are not widespread, but affect market
prices ahead of the meeting.
German 10-year yields were 0.5 basis points
lower at 0.95 percent, off record lows of 0.867 percent hit late
in August, but still below the 0.99 percent seen before Jackson
Hole and 1.07 percent just after last month's ECB meeting.
"We've never been more uncertain about what they'll decide
and how the market will react to that," KBC strategist Piet
"Given the rally in the past month and only a small
correction in the past few days there is scope for a bit of
downside in bonds unless he comes with something straightforward
like a confirmation that indeed the whole council thinks
inflation expectations are de-anchored."
Spanish yields were also a tad lower at 2.28
percent before a sale of 2-3 billion euros of 10- and 30-year
France is also due to sell bonds.
In money markets, negative forward Eonia overnight euro zone
bank-to-bank lending rates suggest investors see some chances
that the ECB may cut rates and no action might push them
slightly higher, Barclays strategists said.
"However ... we expect the market to keep pricing in the
ECB's commitment to its accommodative monetary policy stance,
expecting more actions in the coming months in the form of QE,
meaning that any increase in volatility after today's meeting
would be temporary," they said.
(Reporting by Marius Zaharia; Editing by Catherine Evans)