UPDATE 2-Euro zone bond yields slip after BoJ signals stimulus set to stay

Most euro zone bond yields fell on Wednesday after the Bank of Japan set the tone for further easing ahead by warning of rising risks to its economy, focusing investors' attention on Thursday's European Central Bank meeting. The Bank of Japan retained its ultra-easy monetary settings, and pushed backed expectations that it would exit a vast stimulus programme begun in 2013. It also cut its inflation forecasts and warned of rising risks to the economy from faltering global demand.

Growth concerns are feeding into a strong bid for euro zone bonds, both in the secondary and primary markets, as evidenced by the 50 billion euros of orders placed for Spain's 10-year syndication on Tuesday. "There is a natural demand from institutions and pension funds and you have an environment where you are worried about growth," said Justin Onuekwusi a fund manager Legal and General Investment Management. "What you see is that during every single growth scare bonds do provide protection relative to equities."

Spain's 10-year government bond yield extended falls to a new six-month low at 1.32 percent and was last down around 2 basis points on the day. Most other euro zone bond yields were around one basis point lower.

Investors will also be looking for direction on future monetary policy, and comment on the euro zone's growth outlook, when the ECB meets on Thursday. Daniel Lenz, rates strategist at DZ Bank, said the market was being influenced by political risk from the partial U.S. government shutdown and by worries about a "no-deal" Brexit.

"Even more important is whether the world economy suffers a hard or a soft landing, and how much growth rates come down," he added. "We had International Monetary Fund numbers telling us there would be a cooling down of the economy, though not a severe one," he said, referring to a cut in IMF growth forecasts this week. Germany's 10-year bond yield, the benchmark for the region, dipped a basis point to 0.23 percent. It was set for its third straight day of falls, holding lower even as U.S. Treasury yield headed higher.

"The ECB will likely acknowledge rising downside risks to the outlook for growth without shifting its policy stance or rate guidance significantly," Florian Hense, economist at Berenberg Bank, wrote in a note on Wednesday. Money markets price in around a 50 percent chance of a 10 basis point rate hike in 2019.

Investors are also hoping for guidance on the nature of a successor to the ECB's targeted longer-term refinancing operations (TLTRO). Elsewhere, Germany sold 3.199 billion euros of five year bonds at an auction.

(Reporting by Virginia Furness; Additional reporting by Sujata Rao-Coverley; Editing by Toby Chopra, William Maclean)

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