LONDON: Euro zone government bond yields fell on Tuesday before a speech by European Central Bank chief Mario Draghi, with investors watching for any signs of monetary policy action in the face of record-low inflation expectations.
Confirmation of euro zone inflation data for the month of May could underline the need for central bank action. A Reuters poll suggested the number would be 1.2% year-on-year, missing the ECB's target of just below 2%.
A market gauge of long-term euro zone inflation expectations, the five-year, five-year breakeven rate, was at 1.1440%, near Tuesday's record low and also below the ECB target.
"The last ECB meeting already saw a quite dovish shift and suggested we are a small economic slip away from more monetary easing," ING rates strategist Benjamin Schroeder said.
"What we expect from (Draghi's speech in) Sintra is some details on what the ECB can do to help inflation, with expectations slipping to record lows."
The ECB would be able to manage another rate cut without "tiering" interest rates, Schroeder said, though resuming asset purchases would be hard, since the central bank is approaching its 33% ceiling on German Bund ownership.
Draghi's speech is expected at 0900 GMT and the inflation data at 1000 GMT. The ZEW Institute's survey of German investor morale is also due at 1000 GMT.
Euro zone government bond yields were lower, with German 10-year yields, the benchmark for the bloc, dropping a basis point to -0.254%, heading towards last week's -0.27% record low. Other high-grade euro zone bond yields were 1 to 2 bps lower.
Escalating geopolitical tensions added to the downward pressure on yields. The United States said it would send more troops to the Middle East, citing concerns about a threat from Iran.
U.S. Treasury yields fell, with the benchmark 10-year yield dropping a basis point to 2.075%.
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