April 27, 2018 / 11:27 AM / a year ago

UPDATE 2-Euro zone bond markets regain their poise thanks to ECB

* Euro zone bond yields down 1-4 bps

* German 10-year bond yield hits week-low

* Greece bond yields at 2-1/2 month low

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

By Fanny Potkin

LONDON, April 27 (Reuters) - Euro zone bonds yields fell on Friday as a cautious European Central Bank helped markets regain their footing after a U.S.-led sell off earlier in the week.

ECB chief Mario Draghi played down concerns over softness in the euro zone economy on Thursday as the ECB sought to bolster expectations for a gradual withdrawal of its monetary stimulus.

Analysts said that investors who had been reluctant to buy European government debt because of ECB event risk had moved back into the market. “The ECB meeting was taken on the dovish side, because there was no mention of monetary policy and they seemed to be wavering as to whether to announce what to do (on quantitative easing) at the June or the July meeting,” said Rabobank rates strategist Lyn Graham-Taylor.

U.S. 10-year Treasury yields have fallen back after breaking 3 percent earlier this week on concerns about rising inflation and growing borrowing by the U.S. government.

They remained below that level after U.S. economic growth data on Friday, with the recovery in U.S. bonds supporting euro zone debt markets.

Euro zone borrowing costs were down 1-4 basis points across the board.

“There’s relief for euro zone bonds markets from the sharp U.S-led selloff we’ve seen over the last seven days,” said Commerzbank rates analyst Rainer Guntermann.

“There’s underlying support from here on for Europe markets that has to do with the pent-up re-investments from the ECB portfolios, with high pay backs last week, and which still need to be re-invested by the national central banks.”

Germany’s 10-year Bund yield hit a one-week low of 0.564 percent, below six-week highs hit earlier this week at 0.655 percent. It was set for the biggest weekly fall in four weeks, according to Reuters data.

Euro zone debt markets were also bolstered after data showed Britain’s economy slowed much more sharply than expected in the first three months of 2018, raising questions over whether the Bank of England will raise rates next month.

ECB board member Yves Mersch said on Friday that euro zone inflation would continue to rise but only slowly, largely repeating the bank’s policy message from its rate meeting on Thursday.

Greece’s government bond yields meanwhile hit a 2-1/2 month low as euro zone finance ministers said they are set to decide in June on the future steps to help Greece successfully end its current bailout programme.

“News that discussions will begin is positive for Greece and GGBs (Greek government bonds) given that Germany’s finance minister remains the harshest on debt relief and is now open to talks,” said DZ Bank rates strategist Sebastian Fellechner. (Reporting by Fanny Potkin, additional reporting by Dhara Ranasinghe; Editing by Alison Williams, William Maclean and Peter Graff)

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