UPDATE 1-Core euro zone bond yields hold near lows, before ECB meeting

Eurozone bond yields held near recent lows before a European Central Bank meeting where policymakers will address a market that has scaled back inflation bets and rate-hike expectations after poor economic data.

While the ECB is expected to keep policy unchanged, it meets at a time when markets are blighted by doubts about economic growth, a spat between Rome and Brussels over Italy's budget and big declines on Wall Street.

However, analysts expect the ECB to acknowledge a worsening growth outlook even if they do not expect the global concerns to derail its planned retreat from monetary stimulus.

"Draghi has to offer something a bit more dovish in light of the risk-off environment; at the same time, he has to strike a balance as the ECB surely still wants to exit these extraordinary measures by the end of the year," said ING rates strategist Benjamin Schroeder.

Equity worries on Wednesday drove U.S. Treasury yields to their lowest since early October, pushing down yields of "safer bonds" though risk sentiment was seen improving, which boosted support for higher-yielding euro zone bonds, before Thursday's ECB meeting.

The ECB is likely to be concerned by this week's purchasing managers' data, which that showed growth in the euro zone lost more momentum than expected, pointing to the slowest quarterly growth in more than two years.

The ECB is scheduled to end its asset-purchase programme this year, though there is little detail on its planned reinvestment strategy. "On the QE reinvestment strategy for 2019, the first hints that it was at least discussed should be expected – full clarity will likely come in December," ING analysts wrote in a note to clients on Thursday.

European money markets, meanwhile, have pushed back expectations of a rate increase and no longer fully price in a rise until October 2019. Until last week, they priced in a hike for next September.

Money markets now suggest around a 68 per cent chance of a 10 bps ECB rate hike in September 2019. Expectations for September 2019 had briefly dipped to 60 per cent.

Analysts will want to hear ECB President Mario Draghi's thoughts on core inflation in the euro zone after referring to a "vigorous" pick-up in core inflation at the September meeting.

The five-year five-year forward, a gauge of long-term inflation expectations in the eurozone, is at its lowest point since May 29, standing at 1.67 per cent and inching away from the ECB's target of close to but below 2 per cent.

Germany's 10-year government bond yield, the benchmark for the region, reached 0.403 per cent, having hit a six-week low of 0.388 per cent earlier in the session.

Ten-year French and Dutch bond yields were flat to one basis point higher.

Italian bond yields, on the other hand, fell up to 12 bps across the curve with Italian banking stocks recovering as part of a broader European stock market recovery.

Italy's bank's index was up 2.4 per cent and was set for its best day in six weeks.

Spanish and Portuguese bond yields were also down as much as five bps. Spanish 10-year bonds yields fell to two-and-a-half- week lows at 1.591 per cent.

The Italy/Germany bond yield spread touched a one-week high of 323 bps, its second widest since 2013, but later narrowed to narrowed to 310.3 bps.