LONDON: Euro zone bond yields held close to multi-year lows on Monday with markets waiting for direction on monetary policy from both the U.S. Federal Reserve and European Central Bank this week after inflation expectations in the bloc hit rock bottom.
Euro zone bond yields rose from, though remained close to, the multi-year low hit last week after weak data from China fanned concern about the impact of a bitter trade war and expectations of central bank rate cuts.
Inflation expectations hit an all time-low last week, in a sign that markets do not believe that the ECB will be able to meet its target of close to 2% inflation.
A key gauge of long-term market inflation expectations fell to 1.135% on Friday, its lowest ever level. <EUIL5YF5Y=R.
But ECB Vice President Luis de Guindos on Saturday that longer-term inflation expectations had not yet become de-anchored, and that they would need to before the ECB provides any more stimulus.
Ten-year yields across the bloc were flat to half a basis point higher in early trade with Germany's 10-year bund yield, the benchmark for the region, last at -0.25%.
Global risk appetite was slightly better with the Hong Kong market leading Asian shares higher, after the territory's leader Carrie Lam climbed down on a bill that would have allowed extradition to China.
Focus this week will be on any communication from either the U.S. Federal Reserve or the European Central Bank.
The Fed is not expected to cut interest rates this week but will likely lay the groundwork for a rate cut later this year.
New economic projections that will accompany the U.S. central bank's policy statement on Wednesday will provide the most direct insight yet into how deeply policymakers have been influenced by the U.S.-China trade war, Trump's insistence on lower interest rates, and recent weaker economic data.
The ECB meets in Sintra and are expected to signal their readiness to act decisively, say ING analysts.
"Our economists now see a 10 basis point deposit rate cut in the latter half of the year as likely," ING wrote in a note on Monday.
Italy will also be a key focus for investors this week. Italian government bond yields were flat to very slightly lower with the 10-year yield around one basis point lower at 2.31% .
The European Union looks increasingly likely to impose disciplinary procedures on Italy over the management of its huge public debt, after inconclusive meetings on Friday between the Italian finance minister and his EU partners.
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