Euro zone bond yields a touch lower as markets eye cautious ECB

By Dhara Ranasinghe

LONDON (Reuters) - Borrowing costs in the euro area dipped on Wednesday, with investor sentiment underpinned by a view that the ECB is unlikely to signal significant policy tweaks when it meets this week, given subdued inflation and a stronger euro.

Reduced expectations of another rise in U.S. interest rates this year and the expansionary fiscal policies flagged by U.S. President Donald Trump that could boost inflation helped push down bond yields.

European Central Bank chief Mario Draghi is expected to use Thursday's meeting to calm market expectations of a scaling back of stimulus in coming months.

Comments he made three weeks ago in Sintra, Portugal were seen opening the door to tapering of asset purchases and sparked a sharp selloff in bonds.

Data this week confirmed that euro zone inflation remains tame at 1.3 percent - well below the ECB's near 2 percent target - while further strength in the single currency could dampen inflation by keeping down import costs.

The euro hit its highest level in more than a year against a broadly weaker dollar on Tuesday and is up roughly 3 percent since just before Draghi's Sintra speech.

"A strong euro has also raised expectations that they will not sound overly hawkish," said Benjamin Schroeder, a rates strategist at ING.

Most euro zone government bond yields were 1-2 basis points lower. Germany's benchmark 10-year Bund yield dipped 1 bps to 0.55 percent, off recent 18-month highs.

Germany on Wednesday sold 805 million euros of 30-year government paper.

Concerns that central banks globally are gearing up for a tighter monetary policy stance have been eased in the past week by weak U.S. economic data. On Tuesday, weaker-than-expected inflation numbers in Britain also dampened talk of a rate hike in the months ahead, lifting broader bond market sentiment.

"On the issue of tapering, which has been obsessing the market, we're unlikely to get anything tomorrow and that is reassuring the market," said Antoine Bouvet, rates strategist at Mizuho. "But that doesn't mean the ECB will be dovish or pessimistic about growth - there's no reason for that either."

(Reporting by Dhara Ranasinghe; editing by John Stonestreet)