Euro zone bond markets countdown to new ECB chief's first meeting

Borrowing costs in benchmark euro zone issuer Germany hovered at a one-week low on Thursday, reflecting a degree of caution among investors ahead of an ECB meeting, UK election and a looming deadline for fresh U.S. tariffs against China to take effect.

Christine Lagarde holds her first meeting and press conference as European Central Bank chief. No major policy decisions are anticipated by markets and Lagarde is expected to signal policy continuity from her predecessor Mario Draghi. Analysts say the scope for volatility in bond markets is nevertheless high as investors adjust to the new ECB president's style and stay tuned for any clues about the future of monetary stimulus and an upcoming policy review.

"The probability of a language misstep is high at Lagarde's first news conference and in the first few months of her term because she is not used to how markets will jump on what she says," Rabobank fixed income strategist Lyn Graham-Taylor said. In early London trade, most 10-year bond yields across the single currency bloc were little changed on the day.

Britain's election on Thursday and uncertainty whether the United States will go ahead with a new round of tariffs against China, due to kick in on Dec. 15, added to subdued trading in fixed income markets. Germany's benchmark Bund yield briefly touched a one-week low at -0.325%. It is up around 8 basis points from the ECB's last meeting in October and has risen roughly 40 bps from record lows hit in early September -- reflecting a slightly brighter tone to economic data.

Money markets meanwhile have in recent months priced out the chances of near-term rate cut and are positioned largely for the ECB to keep rates unchanged next year. A U.S. Federal Reserve meeting on Wednesday has added to a sense that major central banks are on hold for now.

Economists expect little change in the ECB's latest economic forecasts, due later on Thursday, with the focus likely to fall on its first projections for growth and inflation in 2022. The ECB will announce its rate decision at 1245 GMT, followed by a news conference at 1330 GMT.

"No overt changes to policy are expected but it's all about Lagarde's tone and responses, especially with regard to the use of fiscal policy by governments, inflation targeting levels and even the maintenance of negative interest rates," said Chris Bailey, European strategist at Raymond James in London.