MILAN, July 19 (Reuters) - Euro zone government bond yields fell on Monday ahead of Thursday’s policy meeting of the European Central Bank (ECB), while concerns about the Delta variant of the coronavirus continued to dampen risk sentiment.
ECB policymakers are set for a showdown as they chart a new policy path, with disagreements on the economic outlook and thus on how much more stimulus, mainly in bond purchases, is needed.
Germany’s 10-year bond yield was down 1 basis point, after hitting a fresh lowest since March 29 at -0.369%.
The yield on the European Union bond issued in June was flat after falling to an all-time low at -0.114%.
“The ECB meeting takes centre stage as it looks set to be different, controversial and with tangible policy implications,” Commerzbank analysts told customers.
“While further sources stories could become a factor as they would probably be more skewed to the hawkish side, the potential for setbacks appears limited with surveys suggesting relatively subdued expectations for tangible changes,” they added.
Deutsche Bank economists expected “some changes to forward guidance and communications around the new average inflation targeting unveiled earlier this month.”
The phase-out of the Pandemic Emergency Purchase Programme (PEPP), which will end in March 2022, and possible changes in the Asset Purchase Programme (APP) were expected to hold the centre stage in the next few days and probably weeks.
“ECB President Lagarde’s remark that the PEPP unwind may be followed by a transition into a new format is already causing speculation to run wild in some quarters ahead of the Thursday meeting,” DZ Bank analysts said.
Italian bonds, which might suffer from reduced flexibility of ECB’s purchases when the PEPP is over, came under some selling pressure, with the 10-year bond yield up one basis point to 0.71%.
Investors expected volatility and possible upward moves in yields to be kept in check as net issuance left for private investors will be significantly negative after ECB purchases.
Meanwhile, dovish comments by the Federal Reserve will cap U.S. Treasury yields -- which were down one basis point in early London trade on Monday -- in the short term.
Uncertainty around the economic impact of the COVID-19 pandemic also remained on traders’ minds.
In self-isolation after being exposed to a person with the virus, British Prime Minister Boris Johnson ended more than a year of restrictions in England and put his faith in vaccines . Meanwhile, Australia and some Asian countries extended restrictions.
(Reporting by Stefano Rebaudo; Editing by Toby Chopra)