June 19, 2019 / 7:33 AM / a month ago

Calm returns to euro zone bond markets after Draghi storm

* Bond yields touch higher after Tuesday’s hefty falls

* ECB policymakers divided after Draghi speech- report

* Focus turns to Fed meeting

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

By Dhara Ranasinghe

LONDON, June 19 (Reuters) - Euro zone bond yields crept up on Wednesday, with a degree of calm returning to markets a day after a surprise hint from ECB chief Mario Draghi of more stimulus triggered the biggest one-day fall in borrowing costs in years.

A U.S. Federal Reserve rate decision later in the day provided another reason for bond investors to pause for thought.

Ten-year bond yields across the bloc were 1-2 basis points higher in early trade - a mere blip in the scale of the moves seen on Tuesday after Draghi said policy would be eased again if inflation fails to accelerate.

Germany’s 10-year bond yields were a touch higher at minus 0.31%, having hit a record low at minus 0.33% on Tuesday when it fell almost 8 basis points - its biggest one-day fall since September 2016.

Tuesday saw long-dated bond yields across the euro area post their biggest one-day falls in at least a year . And a key gauge of long-term euro zone inflation expectations reversed course, posting its biggest one-day rise on Tuesday.

“President Mario Draghi’s Sintra speech opened the way to additional easing by the ECB, in our view,” said Luigi Speranza, chief global economist at BNP Paribas.

News that ECB policymakers were divided, with some feeling powerless, after Draghi’s comments at an ECB conference in Sintra, Portugal, had little impact on a bond market now positioned for more rate cuts from the ECB.

Trading in euro zone money market futures point to more than an 85% chance of a 10 bps rate cut at the ECB’s September meeting. A cut is fully priced in by October.

Some banks have also shifted their calls for when the ECB, which ended its massive asset purchase scheme just six months ago, will ease policy again.

Commerzbank expects the ECB to cut rates in July, having previously anticipated a move in the fourth quarter.

Focus was also on the U.S. Federal Reserve, which concludes its two-day policy meeting later.

It is expected to leave interest rates on hold but flag whether it plans to cut rates later this year as investors expect and the U.S. president has demanded.

Against the backdrop of a bitter trade war, the Fed and other major central banks have turned more dovish recently.

Futures are almost fully priced for a quarter-point easing in July and imply more than 60 basis points of cuts by year-end.

“The way the markets are looking at the trade war is that the Fed will be aggressive and do everything it can to keep the show on the road,” Karen Ward, chief market strategist, EMEA, at JPMorgan Asset Management said at a conference in London on Tuesday.

“My concern is that the Fed cutting rates is not going to be enough to ease the damage of the trade wars.”

Reporting by Dhara Ranasinghe Editing by Andrew Heavens

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