LONDON: Euro zone bond yields dipped on Thursday as the European Central Bank was expected to reinforce its message that it was ready to use all its tools, including bond-buying, to support the economy and lift inflation.
But uncertainty over what the ECB would deliver at its meeting and how committed to further easing would President Mario Draghi be in his speech was high.
He told a central bank conference in Jackson Hole, Wyoming, two weeks ago that financial market expectations of inflation were falling significantly and that the ECB will use all its available instruments to ensure price stability.
Those comments increased expectations of a large-scale bond buying programme - known as quantitative easing, or QE - and pushed bond yields to record lows in most euro zone countries.
Since then, the market has somewhat pared those expectations, with Germany believed to still be reluctant to go down that route, and some analysts expect him to be less aggressive than at Jackson Hole.
Nevertheless, some analysts expect the ECB to cut rates or to make its upcoming long-term loans to banks more attractive, while others expect it to announce a smaller-scale programme of buying asset-backed securities to spur lending in the euro zone. Such expectations are not widespread, but affect market prices ahead of the meeting.
German 10-year yields were 0.5 basis points lower at 0.95 percent, off record lows of 0.867 percent hit late in August, but still below the 0.99 percent seen before Jackson Hole and 1.07 percent just after last month's ECB meeting.
"We've never been more uncertain about what they'll decide and how the market will react to that," KBC strategist Piet Lammens said.
"Given the rally in the past month and only a small correction in the past few days there is scope for a bit of downside in bonds unless he comes with something straightforward like a confirmation that indeed the whole council thinks inflation expectations are de-anchored." Spanish yields were also a tad lower at 2.28 percent before a sale of 2-3 billion euros of 10- and 30-year bonds.
France is also due to sell bonds.
In money markets, negative forward Eonia overnight euro zone bank-to-bank lending rates suggest investors see some chances that the ECB may cut rates and no action might push them slightly higher, Barclays strategists said.
"However we expect the market to keep pricing in the ECB's commitment to its accommodative monetary policy stance, expecting more actions in the coming months in the form of QE, meaning that any increase in volatility after today's meeting would be temporary," they said.
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