Euro zone bond yields hold at lows as inflation outlook dims

LONDON: Euro zone sovereign bond yields held near record lows on Friday, as falling energy prices pulled down consumer price growth across the bloc, raising the chances of more ECB stimulus. Preliminary data showed euro-wide inflation cooled to 0.3 percent in November, in line with analysts' estimates and down from 0.4 pct the previous month.

Consumer inflation has not been at the ECB's target level of close to 2 percent since the start of 2013, and recent data has ramped up expectations the European Central Bank will start buying government bonds to reverse the trend.

Plunging oil prices, which tumbled to four-year lows after OPEC decided not to reduce output, are also weighing on the outlook for consumer price growth.

"It's pretty clear that the vast majority of the disinflation trend has been due to oil prices but it is also clear that this is not a development the ECB can ignore," said Credit Agricole's senior euro zone economist Frederik Ducrozet.

German 10-year yields - the benchmark for euro zone borrowing - were down a fraction at 0.70 percent.

The French equivalents were 2 bps lower at 0.98 pct.

Italian 10-yields also dropped 2 bps to 2.06 percent, even though unemployment in the country reached a record high in October.

The spread between Italian and German yields was near the tightest levels seen this year.

Strategists say any quantitative easing programme would see higher-yielding debt outperform further.

ECB Vice President Vitor Constancio said on Wednesday the central bank may decide as early as the first quarter of 2015 whether to begin buying public debt.

Some think a decision could come even earlier. BNP Paribas joined Credit Suisse on Thursday predicting QE would be announced at the next week's ECB meeting.

The recent sell-off in Greek bonds paused, with yields flat at 8.45 percent.

Athens on Thursday acknowledged a risk of delay to its planned exit from an EU/IMF bailout by the end of the year.

Portugal was the main outlier, as weakness in its stock market, which includes large energy companies, flowed over to government bonds where 10-year yields rose 2 bps to 2.86pc.