Bonds News

UPDATE 2-Euro zone bond markets await Fed, ECB; inflation gauge at new low

* Euro zone bond yields inch up

* Key market gauge of inflation expectations hits new record low

* ECB Sintra gathering, Fed meeting in focus

* Euro zone periphery govt bond yields (Updates prices, adds)

LONDON, June 17 (Reuters) - Euro zone bond yields held near multi-year lows on Monday, as markets waited for monetary policy updates from both the U.S. Federal Reserve and European Central Bank this week after inflation expectations in the euro zone plunged.

Euro zone yields rose but remained close to last week’s multi-year lows, hurt after weak data from China fanned concern about the impact of a trade war and expectations of central bank rate cuts.

A key gauge of long-term euro zone inflation expectations fell to 1.1275% on Monday, its lowest ever, in a sign that markets do not believe the ECB can meet its target of close to 2% inflation.

ECB Vice President Luis de Guindos said on Saturday that longer-term inflation expectations had not yet become un-anchored, and that they would need to before the ECB provides any more stimulus.

Ten-year yields across the bloc inched up 1-2 basis points on the day. Germany’s 10-year Bund yield, the benchmark for the region, was last at -0.24%, up 1.5 bps but within sight of Friday’s record low of -0.27%.

Global risk appetite improved, with Hong Kong leading Asian shares higher after the territory’s leader, Carrie Lam, backed down on a bill that would have allowed extradition to China.

Focus this week will be on the U.S. Federal Reserve and the European Central Bank.

The Fed is not expected to lower rates this week but is likely to lay the groundwork for a rate cut later this year.

“We expect a Fed rate cut in July and it’s most likely that we get a nod towards that this week,” said Rabobank fixed income strategist Matthew Cairns.

“There is pressure on the Fed to say and do something, and that would be an incredible about-turn given where we were six months ago.”

New economic projections that will accompany the Fed’s policy statement on Wednesday will provide the most direct insight yet into how much policymakers have been influenced by the U.S.-China trade war, U.S. President Donald Trump’s insistence on lower interest rates, and recent weaker economic data.

An ECB gathering in Sintra, Portugal, could also signal its readiness to act decisively, say ING analysts.

“Our economists now see a 10 basis point deposit rate cut in the latter half of the year as likely,” they said in a note.

Italy will also be a focus for investors this week. Italian government bond yields were flat to lower, with the 10-year yield down around one basis point at 2.32%.

The European Union looks increasingly likely to impose disciplinary procedures on Italy over the management of its huge public debt, after inconclusive meetings on Friday between the Italian finance minister and his EU partners.

Reporting by Virginia Furness; Editing by Larry King and Hugh Lawson