Euro zone yields track U.S. Treasuries lower, eyes on the ECB | Reuters

Euro zone government bond yields edged lower on Thursday ahead of a European Central Bank (ECB) policy meeting, with investors looking for clues on how the central bank will react to an expected economic recovery.

The bloc’s borrowing costs tracked U.S. Treasury yields, falling in early London trade after an auction of 20-year bonds showed strong demand on Wednesday.

The ECB will likely be pressed on signs of divisions over the future pace of bond purchases, which have been stepped up recently to prevent a rise in borrowing costs from derailing the recovery.

Germany’s 10-year government bond yield, the benchmark of the euro area, fell 1.5 basis points to -0.28%.

Christine Lagarde said recently the economy was still standing on “crutches” and stimulus could not be withdrawn.

“The focus at today’s ECB press conference looks set to turn to the reduction and eventual winding down of the PEPP (Pandemic Emergency Purchase Programme) purchases,” Commerzbank told clients.

Some analysts have recently flagged concerns about a possible “hawkish mistake” by the ECB in June following good news about the European economy.

“The ECB is unlikely to dismiss the possibility of taper in June, likely leaving our bearish tactical bias intact,” Citi analysts said.

Italy’s 10-year yield fell 1.5 basis points to 0.742%, with the risk premium on top of German bonds unchanged at around 101 basis points.

Despite concerns about the ECB’s possible exit from the purchase programme, “prospects for the periphery are improving near-term. The rejection of the preliminary injunction against NGEU (EU pandemic recovery fund) by the German Constitutional Court (GCC) was a surprise,” Commerzbank analysts added.

Germany’s constitutional court declined on Wednesday to block the recovery fund, but it did not indicate when it would rule on the full complaint against the fund.

France and Spain will be in the primary market with auctions, with analysts expecting supply to be absorbed well. (Reporting by Stefano Rebaudo. Editing by Mark Potter)

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