UPDATE 1-Euro zone bond markets await Fed, ECB; inflation gauge at new low

Eurozone bond yields held near multi-year lows on Monday with markets waiting for direction on monetary policy from both the U.S. Federal Reserve and European Central Bank this week after inflation expectations in the euro zone plunged. Eurozone yields rose from but remained close to last week's multi-year low, after weak data from China fanned concern about the impact of war and expectations of central bank rate cuts.

A gauge of long-term inflation expectations fell to 1.1275% on Monday, its lowest ever, in a sign that markets do not believe the ECB can meet its target of close to 2% inflation. But ECB Vice President Luis de Guindos said on Saturday that longer-term inflation expectations had not yet become un-anchored and that they would need to before the ECB provides any more stimulus.

Ten-year yields across the bloc were flat to one basis point higher in early trade. Germany's 10-year bond yield, the benchmark for the region, was last at -0.24%. Global risk appetite improved, with Hong Kong leading Asian shares higher after the territory's leader, Carrie Lam, backed down on a bill that would have allowed extradition to China.

Focus this week will be on the U.S. Federal Reserve and the European Central Bank. The Fed is not expected to lower rates this week but is likely to lay the groundwork for a rate cut later this year.

New economic projections that will accompany the Fed's policy statement on Wednesday will provide the most direct insight yet into how much policymakers have been influenced by the U.S.-China trade war, Trump's insistence on lower interest rates, and recent weaker economic data. The ECB meets in Sintra and is expected to signal its readiness to act decisively, say ING analysts.

"Our economists now see a 10 basis point deposit rate cut in the latter half of the year as likely," ING wrote in a note on Monday. Italy will also be a focus for investors this week. Italian government bond yields were flat to lower, with the 10-year yield down around one basis point at 2.32%.

The European Union looks increasingly likely to impose disciplinary procedures on Italy over the management of its huge public debt, after inconclusive meetings on Friday between the Italian finance minister and his EU partners. 

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