MILAN- A euro zone government bond sell-off triggered by rising inflation expectations eased on Wednesday, though markets remained wary ahead of the European Central Bank's policy meeting on Thursday.

Tapering worries continued to be in the spotlight after St. Louis Federal Reserve Bank President James Bullard said the U.S. central bank should trim its massive pandemic stimulus programme despite a slowdown in job growth last month. 

Focus was on Germany, which sold 3.198 billion euros of a new 10-year green bond at an average yield of -0.38%.

It was Germany's fourth green bond issuance, having already sold five-, 10- and 30-year green bonds since it began such issuance last year.

Unlike other sovereigns, which have focused on issuing one or two green bonds with a long maturity, Germany is building a green yield curve. Each green bond has a conventional twin with which investors can exchange it.

Wednesday's bond offered a greenium of around 4 basis points based on its conventional twin, lower than around 6 bps currently offered by the 10-year green bond Germany issued last year.

The greenium refers to the slightly lower yield green bonds offer relative to conventional peers, driven by a dedicated investor base chasing a limited supply.

"I think it's more of a tricky time for the auction with some bearish momentum in rates and people really not expecting supply to slow down in euro rates more generally," said Peter McCallum, rates strategist at Mizuho in London, referring to the bond demand being low relative to the 3.5 billion euros Germany offered investors.

He expects greeniums to reduce as supply picks up. Spain raised 5 billion euros from a debut green bond on Tuesday, while Britain will sell its first green bond later in September and the European Union is set to launch a green bond issuance programme in October.

On Wednesday, Germany's benchmark 10-year government bond yield dropped 1.5 basis point to -0.33%, while Italy's 10-year yield fell similarly to 0.755%. 

U.S. borrowing costs fell after two days of rises in the wake of the government's jobs report, which showed a wage increase that was double expectations, suggesting inflationary pressures might not be transitory. 

The 10-year Treasury yield was down 2 bps to 1.35% US10YT=RR .

"The gap between break-even (inflation expectations) and Bund yields remains large, which in the current environment marked by stagflation fears implies more (selling) pressure for Bunds," Commerzbank analysts said.

"But we doubt that markets will go for a proper repricing with the ECB waiting in the wings."

Unicredit analysts think the recent selloff won't gain further momentum. "Although we expect the ECB to announce a reduction in Pandemic Emergency Purchase Programme (PEPP) purchases, the central bank will likely avoid giving hawkish messages," they said.

Recent comments by ECB officials have led investors to expect the central bank will decide at its meeting on Thursday to reduce the pace of its pandemic emergency bond purchases in the final quarter of the year.

(Reporting by Stefano Rebaudo and Yoruk Bahceli; Editing by Catherine Evans and Chizu Nomiyama) ((stefano.rebaudo@thomsonreuters.com; +390266129431;))