LONDON: Low-rated euro zone bond yields dipped on Monday as investors positioned for the European Central Bank to reinforce support for the bloc's faltering economy on Thursday against a backdrop of rising tensions over Ukraine.
Policymakers and national leaders joined calls over the weekend for ECB president Mario Draghi to announce further monetary easing -- even though August's inflation print came in line with expectations on Friday, which was seen as reducing the chances of new policy measures this week.
"Investors are positioning themselves for a dovish ECB meeting," said Alessandro Giansanti, rates strategist at ING.
"Peripheral markets will be the main beneficiary from any other action from the ECB in terms of liquidity injections."
Investors will be watching for any details of a broad-based quantitative easing (QE) asset purchase programme, which Draghi hinted at in a speech at Jackson Hole, Wyoming on Aug 22. Some banks, including JP Morgan and Nomura, also expect an interest rate cut.
ECB sources told Reuters last week that new action on Thursday was unlikely but not impossible, and that the barrier to QE was still "very high".
Spanish and Italian 10-year bonds were 4 and 6 basis points lower respectively at 2.20 and 2.39 percent on Monday. Greek and Portuguese equivalents were 6 and 3 bps lower at 5.80 and 3.20 percent.
ECB executive board member Benoit Coeure said the Bank was ready to adjust policy further if needed and boost bank liquidity, in an essay published in Greek newspaper Ta Nea on Saturday.
French Prime Minister Manuel Valls reiterated on Sunday calls for the ECB to go "further" in tackling the problem of an overvalued euro. Valls said the ECB's June decision to cut interest rates was a "strong signal" but more was needed.
Draghi's remarks at Jackson Hole have, however, appeared to raise the ire of some politicians, pointing to divisions at the heart of Europe's establishment.
German news magazine Der Spiegel reported on Sunday that Chancellor Angela Merkel called Draghi to voice her discontent over his comments that proposed a greater emphasis on fiscal stimulus over austerity in order to boost growth in Europe.
A German government spokesman denied Der Spiegel's account of the call.
"Europe is sinking ever deeper into the quagmire, be that on the economic, military or political fronts. Yet the policy responses show little evidence of the decisive leadership that is needed," said Ciaran O'Hagan, strategist at Societe Generale.
German 10-year bond yields were flat at 0.88 percent on Monday, just off record lows of 0.867 percent hit last week, as the latest chapter of the conflict in Ukraine kept up demand for safe haven assets.
Russian President Vladimir Putin called on Sunday for immediate talks on the "statehood" of southern and eastern Ukraine, although his spokesman said this did not mean Moscow now endorsed rebel calls for independence for territory they have seized.
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