By John Geddie
LONDON (Reuters) - Euro zone sovereign bonds firmed up on Wednesday as investors prepared for what is expected to be a strong set of policy easing measures from the European Central Bank.
A bout of nervousness that gripped the market on Tuesday as investors feared the ECB may not deliver enough to stave off weakening inflation and low growth, appeared to have subsided, said strategists.
"There was nervousness because in the past investors have looked for central banks to hold their hands and have been burned. But investors also realise that the ECB has now taken a much more serious tone," said Simon Peck, an interest rate strategist at RBS.
Media reports released overnight reiterated the ECB's dovish stance for market participants. Bloomberg cited unnamed central bank officials as saying ECB President Mario Draghi is likely to signal that any rate cut this week won't necessarily be the last even though the deposit rate is expected to move into negative territory for the first time.
One official added that an anticipated scheme designed to boost lending to small and mid-sized firms could see the ECB offering banks funding equivalent to 5 percent of their outstanding loan portfolios.
Commerzbank estimates that such a scheme, based on all outstanding euro area bank loans, could amount to as much as 530 billion euros, while if it is just limited to non-financial peripheral corporations it would be around 90 billion euros.
Ten-year German bond yields, the benchmark for euro zone lending, opened one basis point lower at 1.35 percent, reversing some of Tuesday's losses which saw yields rise as much as seven basis points.
The firmer backdrop bodes well as Germany looks to raise 4 billion euros through the sale of a five-year bond by auction later on Wednesday. The last two auctions from Germany have resulted in technical failures, with the Bundesbank retaining a large share to allow the government to sell its targeted amount.
In the periphery, Spanish and Italian bonds were unchanged at 2.86 and 2.99 percent, respectively.
Spain's service sector expanded for the seventh month running in May, while Italy's expanded for the second straight month, data showed on Wednesday.
France, the euro zone's second-largest economy, remained the laggard, with its service activity falling back into contraction.
Euro zone business growth also eased in May, with final data coming in below initial estimates.
While many argue the differing economic cycles on either side of the Atlantic have seen a decoupling in U.S. and euro zone rates products, investors will still be keeping a close eye on U.S. ADP employment data due out later on Wednesday.
That data, a precursor to Friday's nonfarm payroll release, comes amid calls from some U.S. Federal Reserve officials to start raising rates steeply once it has finished winding down its programme of asset buying.