German bond yield curve near flattest in a year before ECB minutes

LONDON: Euro zone government bond yields stayed off recent lows on Thursday as investors awaited publication of European Central Bank minutes that could provide clues on how the bank intends to tighten policy in 2019.

While the ECB is set to end its 2.6 trillion euro bond-buying scheme at the end of 2018, bets on when it will raise interest rates and how it will manage the reinvestment of its maturing debt have moved markets in recent weeks.

Investors expect the ECB minutes, due at 1130 GMT, to shed some light on these matters, particularly after sources told Reuters that policymakers are split over when the ECB might raise interest rates next year. The report pulled euro zone bond yields off their lows on Wednesday.

In addition, the market will also look for any clues on how the ECB will deploy redemptions from its existing holdings - including whether it will focus on buying long-dated bonds, as reports suggest.

"Market participants will look if there are any hints about this period after Jan 2019. This is currently the hottest topic regarding the ECB," said DZ Bank analyst Sebastian Fellechner.

"Any hints that they spoke about operation 'twist' could contribute further to the flattening of yield curves," he said, referring to a plan to buy more long-dated debt with cash from redemptions to maximise the impact of purchases.

Already yield curves across the euro zone have flattened - the gap between two- and 10-year German borrowing costs, for example, are close to their narrowest in over a year at 97 basis points.

On Thursday, most government bond yields were unchanged to a touch higher. Germany's 10-year government bond, the benchmark for the region, was flat at 0.31 percent, and off recent five-week lows of 0.28 percent.

Italy's 10-year government bond was also steady, with yields hovering in the middle of a recent range at 2.69 percent even as the country's debt management agency sold 6.5 billion euros in bonds at an auction.

While Italian debt has suffered heavy losses in recent weeks as a coalition of anti-establishment parties came into power, the higher yields on offer have been enough to tempt some investors on board.

Later on Thursday, U.S. inflation data could provide some direction on how trade wars are going to affect consumer prices, and by extension, monetary policy.

Expectations are for a 2.9 percent year-on-year rise in consumer prices in June and a 2.3 percent increase in core inflation.

"Whether or not the Fed looks through higher prices on account of the risk to growth posed by a trade conflict, we see the inflation report as a bearish risk for rate direction," Mizuha analysts said in a note.

The yield on 10-year U.S. Treasuries was 2 bps higher at 2.86 percent.