Euro zone yields steady with ECB expected to downplay #Euroboom

By Abhinav Ramnarayan

LONDON, Dec 14 (Reuters) - High-grade euro zone government bond yields held near recent lows ahead of a European Central Bank meeting at which ratesetters are expected to play down strong growth and inflation numbers.

The world's two largest economies, the United States and China, both tightened policy overnight, but the ECB, while likely to bump up some of its economic forecasts on Thursday, is expected to leave the stimulus taps open.

The European economy has strengthened in 2017, leading some to argue the case for a quicker removal of extraordinary stimulus.

But though the ECB may well upgrade its growth and inflation forecasts for 2018, analysts believe ratesetters will strike a cautious tone that would put downward pressure on euro zone bond yields.

"We think (ECB President Mario) Draghi will be at pains to downplay the significance for monetary policy of higher growth and inflation next year," Mizuho strategists said in a note.

They expect the "lacklustre" performance of European government bonds in recent times to reverse as this happens.

German benchmark bond yields were marginally higher on the day at 0.31 percent after a survey showed Germany's private sector growing at its strongest rate in more than 6-1/2 years in December.

But the yield remains well below the 0.48 percent it reached in October, just before the ECB first said it would extend asset purchases until at least September 2018.

Since then, data showed the euro zone economy grew by more than the United States year on year in the third quarter.

That juxtaposition is particularly striking as the U.S. has been systematic in tightening monetary policy.

On Wednesday, the Federal Reserve raised interest rates by 25 basis points as expected and left its rate outlook for the coming years unchanged, though policymakers projected a short-term jump in U.S. economic growth from the Trump administration's proposed tax cuts.

China's central bank on Thursday nudged up money market rates as authorities sought to defuse financial risks without imperilling the economy.

Other euro zone bond yields were flat to a touch lower on Thursday, though southern European debt sold off a touch ahead of a scheduled 7.5 billion euro bond auction by Spain.

Yields usually rise ahead of such auctions as investors sell bonds to make space for the new supply.

Spanish, Italian and Portuguese 10-year government bond yields were 1-2 bps higher.

In relative terms, a sell-off in Italian debt cooled. The country's 10-year borrowing costs had registered their biggest one-day rise since July on Wednesday after reports that March 4 has been chosen as the date for national elections.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets

(Reporting by Abhinav Ramnarayan; editing by John Stonestreet)

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