January 23, 2020 / 8:21 AM / a month ago

Euro zone bond yields inch down as ECB gets set to launch key review

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

By Dhara Ranasinghe

LONDON, Jan 23 (Reuters) - Government bond yields across the euro zone nudged down on Thursday ahead of a meeting of the European Central Bank, which is set to launch a broad policy review that is likely to redefine its inflation goal.

Italian borrowing costs were broadly lower, having risen on Wednesday on renewed political uncertainty as Luigi Di Maio stepped down as leader of Italy’s co-governing 5-Star movement.

Anxiety in world markets about the spread of a new flu-like virus in China just as millions prepared to travel for the Lunar New Year holiday supported demand for higher-rated bonds.

In early trade, Germany’s benchmark 10-year Bund yield was about a basis point (bps) lower on the day at -0.27% , hovering near a two-week low hit the previous session.

French 10-year bond yields, which pushed back below 0% on Wednesday, traded at -0.01% — hovering near six-week lows.

Trading activity was generally subdued ahead of the ECB meeting and central bank chief Christine Lagarde’s news conference.

“It’s all about the review,” said Peter Schaffrik, global macro strategist at RBC Capital Markets.

“Anything that gives clarity about the timing and structure would be helpful.”

Lagarde is expected to announce the start and scope of the ECB’s first strategic review since 2003, which will last for most of the year and span topics from the inflation target to digital money and the fight against climate change.

The ECB has failed to meet its near 2% inflation target for years, even after aggressive monetary stimulus.

Bond markets would also be paying attention to how the ECB views the economic outlook, analysts said, given some signs that the worst may be over for the bloc’s economy.

“The ECB’s economic assessment this week could reveal important nuances,” analysts at BAML said in a note.

“The risk balance is very likely to remain negative, but the magnitude of the downside risks may have somewhat abated.”

Italy’s 10-year bond yield was 3 bps lower on the day at 1.32%, with the gap over German Bund yields at around 159 bps — down 10 bps from levels briefly touched on Wednesday.

While Di Maio’s resignation as 5-Star leader is not expected to bring down the government, it highlights deep divisions within 5-Star and further unsettles its fractious ties with its coalition partner, the centre-left Democratic Party.

Reporting by Dhara Ranasinghe; editing by Philippa Fletcher

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