LONDON: German 10-year bond yields were set for their biggest weekly drop in seven weeks on Friday, while Italian yields were set for a seventh straight week of declines as expectations for central bank easing bolstered euro zone bond markets.
Having sold off last week, a rally in bond markets resumed this week -- pushing up prices and pushing down yields.
"Last week we did see a big sell off and when we entered this week it was a buying opportunity because central banks are expected to ease policy," said Pooja Kumra, European rates strategist at TD Securities in London.
"And adding to that we've had further signals that we will get easing soon."
Two influential Federal Reserve officials on Thursday sharpened their public case for acting, quickly if needed, to support the U.S. economy, reviving bets the central bank may deliver a double-barrelled interest rate cut this month.
A report on Thursday meanwhile that European Central Bank staff were studying a potential change to the bank's inflation goal of near 2% added to expectations for easing in the euro zone soon.
Analysts said while the news was not a surprise given that ECB officials including President Mario Draghi have debated the adoption of symmetric inflation target, Thursday's report was timely.
"At the very least, it would reduce the risk that the ECB withdraws stimulus too quickly when inflation shows signs of returning to target," analysts at ING said in a note. "The implication, therefore, is bullish for euro rates."
The ECB meets next week and is widely expected to flag a cut in its deposit rate as early as September.
In early Friday trade, most 10-year bond yields in the single currency bloc were down around a basis point on the day.
Germany's 10-year bond yield dipped to minus 0.32% . It is down almost eight bps this week and set for its biggest weekly fall since the end of May.
Italy's bond yields were set for their seventh straight week of declines.
Its bond market has outperformed euro zone peers in recent weeks thanks to ECB easing speculation and relief that Rome took action to avoid disciplinary action from the European Union over its fiscal position.
Italy's 10-year bond yield was down 2 bps at 1.54% , near almost three-year lows hit the previous session.
"If the ECB does disappoint the market next week that would be felt most in Italy's bond market because it has benefited the most from ECB easing expectations," said Kumra at TD Securities.
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