Euro zone bond markets pause before ECB, but Italy yields rise

LONDON: Most euro zone government bond yields were little changed on Thursday, with the market largely sidelined ahead of a European Central Bank meeting.

Italy's debt market was the outlier, with yields there rising as markets absorbed almost 8 billion euros of new bonds as well as a fresh wave of noise on the 2019 budget.

The ECB is expected to keep policy unchanged, making only nuanced tweaks to its guidance to stay on course to end its 2.6 trillion euro stimulus this year and raise interest rates next autumn.

At the same time, slight downward revisions to economic growth forecasts are anticipated following weak data over the summer months.

ECB Chief Mario Draghi may be pressed for clarity on the timing of a rate hike and for more details on plans to reinvest funds from maturing bonds the ECB holds under quantitative easing.

"Our sense is that we will get a dovish press conference from Draghi," said Dean Turner, an economist at UBS Wealth Management in London.

"The economy is doing fine and inflation is printing at or around target - but the immediate concern for us is that Italy continues to make headlines, as does Brexit, and trade."

Money market pricing suggests investors anticipate the first ECB rate hike since 2011 to come just over a year from now .

Higher-rated euro zone bond yields were flat . Germany's Bund yield was steady at around 0.41 percent, below five-week highs hit this week.

The ECB will announce its policy decision at 1145 GMT, followed by Draghi's news conference at 1230 GMT. The Bank of England also meets on Thursday, as does Turkey's central bank which is in focus given a currency crisis and broader turmoil in emerging markets.

BBVA strategist Jaime Costero Denche said bond investors would be looking for the ECB to give more details on how it will reinvest funds from maturing bonds and in particular, how long it will make reinvestments, and how much flexibility it will allow in terms of timing and geographic location.

"No new details on forward guidance are likely today so the focus is likely to be on the reinvestment strategy and this is key," he said.

Italy's bond yields rose 3-4 bps , continuing to rise a day after signs of tension within the governing coalition over the 2019 budget resurfaced.

Deputy prime minister and 5-Star leader Luigi Di Maio denied on Thursday any tensions with Economy Minister Giovanni Tria after reports that Tria could resign due to 5-Star pressures to fund the party's flagship campaign promise of a universal income for the poor.

The Italian/German bond yield gap briefly narrowed before widening again as markets absorbed new supply.

Italy sold 7.75 billion euros of three-, seven, and 30-year debt, at the top of its planned issuance range. But it paid the most since 2014 to sell those bonds.