* Euro zone bond yields tumble on report
* ECB’s Villeroy says must keep eye on FX rate
* Two-year German yields set for biggest one-day fall in 6 weeks (Updates prices, adds Villeroy comments on euro)
By Fanny Potkin
LONDON, Jan 16 (Reuters) - Euro zone borrowing costs fell on Tuesday after a report that the European Central Bank is unlikely to ditch a pledge to keep buying bonds at next week’s meeting eased concern about an early end to the bank’s stimulus scheme.
ECB rate setters need more time to assess the outlook for the economy and the euro, three sources close to the matter told Reuters.
That news bought relief to bond markets, unnerved in the past two weeks by signs that the ECB could be shifting towards an earlier-than-anticipated end to its 2.55 trillion euro ($3.12 trillion) asset-purchase programme.
Germany’s 10-year government bond yield was down 4 basis points at 0.49 percent, comfortably below five-month highs hit last week.
Thirty-year bond yields tumbled 5 basis points and were set for their biggest one-day fall since Dec 1. Two year German bond yields were set for their biggest daily fall in six weeks and were last down around 1 bps at 0.60 percent .
In an interview published on Tuesday, France’s central bank governor Francois Villeroy de Galhau said the rise in the euro was a “source of uncertainty” that ECB rate setters had to monitor, piling upward pressure on bond yields.
Italian and Spanish bond yields were down 4 bps each , with the gap between Italian and German bond yields at its tightest level in over a month at 144 bps.
The ECB signalled last week a growing appetite for revising its policy message in “early” 2018, and specifically a promise to continue its money-printing programme until inflation heads back to target.
But three sources on or close to the ECB’s policy-making Governing Council said any fundamental change to the guidance was likely to come only later, with the March meeting - when policymakers get updated economic forecasts - seen as a more likely option.
“The market is looking for any tone that the net asset purchases programme will end. Our view is that’s not the wisest way to be looking at the directionality of the market because the headline inflation rates and the core measures held still between November and December,” said Rabobank rates strategist Matt Cairns. “The ECB is not there yet!”
The ECB has pledged to keep rates at their current, record low levels “well past” the end of its bond buys, a signal markets have taken to mean around three to six months.
But Ardo Hansson, the Estonian central bank governor, implicitly kept a December hike in play by saying on Monday the ECB could end its bond purchases in one go after September.
Money markets continue to price in around a 70 percent chance of a 10 basis point rate rise from the ECB by year-end, suggesting investors believe the days of the bank’s ultra-easy monetary policy stance are nearing an end. ($1 = 0.8176 euros)
Reporting by Fanny Potkin; Additional reporting by Dhara Ranasinghe; Editing by Mark Heinrich/