By Dhara Ranasinghe
LONDON, July 16 (Reuters) - Government bond yields in southern Europe inched up on Thursday, but stayed close to recent multi-month lows, before an European Central Bank (ECB) meeting widely expected to mark a pause after a series of policy moves to support the pandemic-hit economy.
Amid signs the euro zone economy is now stabilising, some ECB board members have suggested the entire Pandemic Emergency Purchase Programme (PEPP) "envelope" - boosted to 1.35 trillion euros ($1.52 trillion) in June - might not be spent.
To keep markets calm, economists say the challenge for ECB chief Christine Lagarde is to acknowledge data is improving but reiterate her commitment to stimulus given an uncertain outlook.
Aggressive ECB action has stabilised markets and helped narrow euro area bond spreads that widened in March when coronavirus-panic gripped markets.
Italy's 10-year bond yield is down almost 30 basis points (bps) since the ECB ramped up its emergency bond-buying scheme on June 4 to support an economy hit by the COVID-19 crisis.
And the closely-watched gap over benchmark German Bund yields is at 172 bps DE10IT10=RR - more than 60 bps narrower than two months ago. Spanish and Portuguese bond spreads over Germany have also tightened.
"Lagarde is likely to emphasise that the PEPP envelope is a ceiling, that there is no obligation to go as far as the 1.35 trillion euros, but the expectation is that they will do more," said Chris Scicluna, head of economic research at Daiwa Capital Markets.
Italy's 10-year bond yield was last up 2 bps on the day at 1.29% IT10YT=RR, having touched its lowest since late March on Wednesday at around 1.25%. Germany's benchmark Bund yield was steady at -0.45% DE10YT=RR as the ECB meeting and a European Union summit, starting on Friday, loomed.
The ECB delivers its decision at 1145 GMT, followed by Lagarde's press conference at 1230 GMT.
"This will be a non-event with a big test for Lagarde's communication skills," Carsten Brzeski, chief economist for the euro zone at ING told the Reuters Global Markets Forum this week. "The real action will and can only come once we have July macro data. This will be for the September or October meeting."
Analysts saw a chance the ECB could increase the amount of bank excess reserves it exempts from being charged at the -0.50% deposit rate to help offset the impact of negative interest rates on the banking sector.
Southern European government bond spreadshttps://tmsnrt.rs/2ZApZEq
(Reporting by Dhara Ranasinghe; editing by Barbara Lewis and Mark Potter)
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.