Euro zone bond yields dip as weak data revives talk of looser policy

LONDON: Euro zone bond yields dipped on Wednesday after the region's two largest economies reported poor industrial data, keeping alive the chances that the European Central Bank will be forced to step in and support the bloc's fragile recovery.

German manufacturing orders recorded their biggest decline in 1 1/2 years in March and French industrial output fell way below forecast. That gave the ECB another reason to loosen monetary policy, alongside a strong euro and low inflation.

"It raises the likelihood that the ECB will act to address now only the inflation situation, but weak macro-economic data as well," said Alexander Aldinger, an analyst at Commerzbank.

Few expect the ECB to take immediate action at its meeting on Thursday, but a rate cut or a liquidity injection by suspending its weekly deposit tenders could come as soon as next month.

Any move to print money by buying assets is likely to be some way off. German and French 10-year yields both reached their lowest levels this year on Wednesday, dipping 1 basis point to 1.45 and 1.92 percent, respectively.

Lower-rated bonds in Italy, Spain and Ireland edged lower as well.

Traders said the mounting threat of civil war in Ukraine has also supported safe-haven fixed-income assets while global equity markets struggled. Ukraine has seen its deadliest week since a separatist uprising began, leaving little room for peace efforts.

This flight to core paper should support Germany's first bond sale after a three-week pause on Wednesday, although analysts warned low yields could still temper demand.

"German auctions are tricky because yields are so low.

I don't think it will be disappointingly weak, but I am not expecting a spectacular bid-to-cover ratio," said Marius Daheim, chief strategist at Bayerische Landesbank.

The Finanzagentur will sell a new five-year bond, maturing in April 2019 and named OBL169, on Wednesday with the aim of raising 5 billion euros.

European markets will also be listening intently to US Federal Reserve leader Janet Yellen, who is due to speak at congressional hearings starting Wednesday.

A stalling US economy has led to questions about when the Fed will raise rates. Forecasters see rates rising in the US from 2015, a move that would also be felt in Europe even though the continent's economic cycle is less advanced.