LONDON: Low-rated euro zone bond yields mostly dipped on Monday as data showing tepid growth in manufacturing fuelled speculation that the ECB would increase support for the bloc's faltering economy at its meeting on Thursday.
Policymakers and national leaders joined calls over the weekend for ECB president Mario Draghi to ease policy further, although many think Draghi will favour words rather than action this week as he waits for existing measures to take effect.
Concerns about the economy rose after Monday's data showed euro zone manufacturing had grown at its slowest pace in over a year in August, as new orders dwindled and factories suffered because of rising tensions with Russia over the crisis in Ukraine.
"The data was soft, particularly in Germany. It's all reinforcing the concerns about the euro zone economy in general," said Orlando Green, a fixed income strategist at Credit Agricole.
"The market, in some cases, given what Draghi said in Jackson Hole, is anticipating some further loosening of policy (by the ECB)."
Italian and Portuguese 10-year bond yields were 3 basis points lower at 2.41 and 3.20 percent respectively, while Greek equivalents were 8 bp lower at 5.78 percent.
Banks including JP Morgan, Nomura and RBS are urging the ECB to cut interest rates this week, with some expecting Draghi to lower the charges on the emergency loans (TLTROs) that will be made available to banks for the first time this month.
Others will be keeping a close ear out for more readiness to launch a broad-based quantitative easing (QE) asset purchase programme, which Draghi hinted at in a speech at Jackson Hole, Wyoming, on Aug. 22.
"An aggressive verbal intervention, signalling a greater willingness to embark into a QE program, is necessary to validate Draghi's speech," Deutsche Bank said in its weekly bond market strategy note.
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".
But as the euro zone's outlook dims, many are betting that the ECB will eventually be forced to use all the tools in its armoury. Deutsche Bank estimates the market is currently pricing in a 50 to 70 percent probability of an unlimited QE programme.
INTO THE QUAGMIRE
ECB executive board member Benoit Coeure said the ECB was ready to adjust policy further if needed and boost bank liquidity, in an essay published in the Greek newspaper Ta Nea on Saturday.
Meanwhile, French Prime Minister Manuel Valls on Sunday reiterated calls for the ECB to go further in tackling the problem of an overvalued euro. Valls said the ECB's decision in June to cut interest rates was a "strong signal", but more was needed.
However, Draghi's remarks at Jackson Hole have irritated some politicians, notably in Germany, one of the greatest sceptics on the value of printing money.
The German news magazine Der Spiegel reported on Sunday that Chancellor Angela Merkel called Draghi to voice her discontent over his comments proposing a greater emphasis on fiscal stimulus over austerity in order to boost growth. A German government spokesman rejected 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.
Spanish bonds slightly underperformed their periphery peers as the market prepared to absorb a 50-year bond sold via private placement.
Yields on 10-year debt were 2 bp up at 2.26 percent while those on 30-year paper were 7 bp higher at 3.53 percent.
Among top-rated bonds, German 10-year bond yields were flat at 0.88 percent, 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.
Ukrainian President Petro Poroshenko accused Russia on Monday of "direct and open aggression", which he said had radically changed the battlefield balance as Kiev's forces suffer major reverses in their war with pro-Moscow separatists.
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