Euro zone bonds steady ahead of ECB meeting

Euro zone bond yields held near eight-week highs on Thursday ahead of the European Central Bank's policy meeting, where it is expected to announce a token step towards reducing its bond purchases.

The bank will set the pace of its pandemic emergency bond buying (PEPP) purchases for the fourth quarter at the meeting. A Reuters poll expects only a slight slowdown -- to 70 billion euros a month from the current 80 billion euros -- and this would remain a high pace by historical standards.

But the bloc's bond markets have been on alert after they were rattled by a series of hawkish comments from policymakers last week, which sent yields higher as investors priced in some degree of a hawkish ECB move.

Together with economic recovery and easy financial conditions given inflation-adjusted bond yields near record lows, that has raised the stakes for the meeting. Focus will also be on the ECB's economic projections, which are expected to be revised upwards.

By 0722 GMT, Germany's 10-year yield, the benchmark for the bloc, was unchanged at -0.32%, just below the eight-week high at -0.31% touched on Wednesday.

Italy's 10-year yield was up less than a basis point at 0.76%.

"When it comes down to market reaction it is again more about how the ECB manages expectations, especially regarding the future of its asset buying programmes, especially the APP (Asset Purchase Programme), rather than the concrete announcement of the volume target for the upcoming quarter," ING analysts told clients.

But, "our base case is for a small dovish reaction that will see bond yields retrace part of their late summer sell off," they added.

The APP is the ECB's conventional bond purchases at 20 billion euros a month that many analysts expect will need to be increased once PEPP purchases end.

Many analysts see a PEPP purchase slowdown as a largely technical adjustment. Given the remaining PEPP envelope, the ECB would not be able to buy more than 73 billion euros a month on average anyway, according to UniCredit.

In the primary market, Ireland will raise up to 1.25 billion euros from the re-opening of 10 and 20-year bonds in an auction.