Borrowing costs in the euro area dipped on Wednesday, with investor sentiment supported by a view that the ECB is unlikely to signal significant policy tweaks when it meets this week, given subdued inflation and a stronger euro.
European Central Bank chief Mario Draghi is also expected to use Thursday`s meeting to calm market expectations of a scaling back of stimulus in coming months.
Comments he made three weeks ago in Sintra, Portugal were seen opening the door to tapering of asset purchases and sparked a sharp selloff in bonds.
Data this week confirmed that euro zone inflation remains tame at 1.3 percent - well below the ECB`s near 2 percent target - while further strength in the single currency could dampen inflation by keeping down import costs.
The euro hit its highest level in more than a year against a broadly weaker dollar on Tuesday and is up roughly 3 percent since just before Draghi`s Sintra speech.
"It appears that since that speech, ECB policy makers have had a revaluation and will try to limit market reaction to tapering expectations," said Benjamin Schroeder, a rates strategist at ING.
"A strong euro has also raised expectations that they will not sound overly hawkish."
Most euro zone government bond yields were flat to 1 basis point lower in early Wednesday trade.
Germany`s benchmark 10-year Bund yield dipped 0.5 bps to 0.55 percent, off recent 18-month highs.
A scaling back of expectations for another rise in U.S. interest rates and weaker-than-expected UK inflation data that dampened prospects of a hike in Britain have also supported bond markets this week.
In a test of investor appetite for debt from the euro zone`s benchmark issuer ahead of the ECB meeting, Germany holds a sale of 30-year government bonds on Wednesday. Analysts said they expected the recent market selloff to tempt investors back.
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