LONDON: Euro zone bond yields fell on Thursday before a European Central Bank meeting that is expected to deliver a further dose of monetary stimulus to boost inflation and economic growth. Markets are pricing in a cut in the deposit rate to -0.4 percent from -0.3 percent.
Analysts polled by Reuters also see a 60 percent chance the ECB will raise its monthly asset purchases, probably by 10 billion euros to 70 billion euros a month.
There has been talk about more radical ideas such as a multi-tier deposit rate or buying non-performing bank loans.
The ECB could also scrap the lower price limit it is prepared to buy at and purchase more risky types of asset-backed securities. But after being disappointed in December, when policymakers delivered less easing than expected, investors are cautious.
"I don't think expectations are as high as they were going into the December 3 meeting, and the ECB has been careful not to drive expectations too high," said DZ Bank strategist Christian Lenk.
Ten-year bonds yields were 1-5 basis points lower across the region, with Germany's benchmark 10-year Bund yield down 2.5 basis points at 0.21 percent and heading towards 10-month lows hit last week at about 0.10 percent.
The two-year German Schatz yield was at -0.55 percent and within sight of last week's record low of -0.58 percent.
It has fallen 20 basis points since the start of the year on speculation about further monetary stimulus.
The ECB's decision to cut its deposit rate and extend the life of its quantitative easing programme in December has failed to lift inflation expectations.
The ECB's favourite market inflation indicator, the five-year, five-year breakeven forward, is at about 1.47 percent - more than 30 basis points below levels seen just before the December meeting. Inflation has been below the ECB's nearly 2 percent target for three years and is likely to remain so for many more.
Analysts said the ECB was also likely to be wary about taking rates too deep into negative territory after the Bank of Japan's decision in January to adopt negative interest rates rattled global markets.
"The BoJ's foray into negative rate policy showed the self-defeating nature of negative rates in that they represent a de facto tax on global banking," said Richard McGuire, head of rates strategy at Rabobank.
"That tilts the odds away from an aggressive depo rate cut and towards more QE."
There was some scope for surprise on Thursday, with some seeing December's disappointment as the exception to the rule for ECB President Mario Draghi.
Pimco said this week it expects the ECB to remove the yield floor for asset purchases and introduce tiered rates.
Policy easing may also face less resistance than in December as the ECB's rotating voting rights mean several hawks, including Bundesbank President Jens Weidmann, will not get to vote this time.
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