Euro zone bond yields inch higher ahead of ECB meeting

LONDON: Euro zone bond yields edged up slightly on Thursday, with debt markets focused on the European Central Bank's first meeting of 2021, against a backdrop of growing economic challenges for the bloc.

The ECB is widely expected to keep its deposit rate unchanged at -0.5% when it announces its decision at 1245 GMT. The rate decision will be followed by a news conference at 1330 GMT.

The central bank boosted emergency bond buys by 500 billion euros ($606 billion) at its last meeting in December, taking the Pandemic Emergency Purchase Programme's (PEPP) firepower to 1.85 trillion euros.

Since then, many European countries, including France and Germany, have tightened or extended coronavirus lockdown restrictions, casting doubt over the economic outlook for the euro zone.

Investors will be listening in particular for comments from ECB President Christine Lagarde about yield curve control, after policymaker Pablo Hernandez de Cos said this month that the ECB should consider this measure to raise inflation.

"Lagarde has to strike a balance between suggesting that current policy stance is appropriate and not go too far the other way," said Jack Allen-Reynolds, senior European economist at Capital Economics.

"The PEPP has been enough to keep spreads under control -- look at how stable yields and spreads have been in the last nine months or so -- it's clear that they have some spread or yield levels in mind that they are willing to tolerate," he added.

Commerzbank rates strategists wrote in a note to clients that Lagarde "should reiterate the mantra that the ECB will take measures to 'preserve favourable financing conditions' and 'contain fragmentation', which is the ECB's version of yield curve control."

"She should not affirm or may even deny speculation, however, that the ECB is pursuing specific spread targets," they said.

Euro zone government bond yields were flat as markets opened, but edged up by around one basis point during the morning session.

At 1115 GMT, the benchmark German 10-year yield was up one basis point on the day at -0.52%.

For riskier Italian bonds, the 10-year yield was little changed at 0.585%.

Italy's bonds have come under pressure from political instability in Rome in the past two weeks. Italy's benchmark borrowing costs fell to their lowest in over a week on Wednesday after the government won a confidence vote in the senate, avoiding a collapse.

In a busy day for issuance, Spain sold more than 6 billion euros worth of four bonds, with maturities between 5 and 20 years and France issued around 10 billion euros in short-dated bonds.