LONDON: Euro zone government bond yields held around record lows on Thursday after a sharp fall in Spanish consumer prices kept markets hooked on the prospects for further monetary policy easing by the European Central Bank.
Spanish EU-harmonised consumer prices fell by 0.5 percent on the year in November, data showed, compared with a consensus forecast for a 0.3 percent drop and a 0.2 percent decline a month earlier.
German inflation later in the day is expected to come in at 0.6 percent, while the figure for the entire euro zone - due on Friday - is seen at 0.3 percent, well below the ECB's target of just below 2 percent.
Ten-year German Bund yields, which set the standard for euro zone borrowing costs, were down 1 basis point at 0.726 percent, just above a record low of 0.716 percent.
Spanish and Italian 10-year yields fell 2 bps to 1.96 percent and 2.14 percent, respectively - both within touching distance of their troughs.
"Deflationary pressures are still very active," said Patrick Jacq, rate strategist at BNP Paribas. "We know the ECB is willing to deliver and ready to deliver via sovereign bond purchases and this is giving some support to bond markets."
Jacq said the market was gearing up for a possible ECB move as early as next week, but added that he thought comments from ECB policymakers suggested the bank's governing council would wait until next year.
ECB Vice President Vitor Constancio said the central bank may decide as early as the first quarter of next year whether to begin buying sovereign bonds. The bank is already buying covered bonds and asset-backed securities, but many analysts believe those would not be enough to expand the ECB's balance sheet by about one trillion euros as planned.
A Reuters poll of economists showed there was a 50-50 chance the ECB would buy government bonds, unchanged from earlier this month.
ABN AMRO calculations showed Greek, German, Portuguese and Spanish bonds would benefit most if the ECB started buying sovereign debt and focused on longer maturities. http://link.reuters.com/fan53w
Italy will issue up to 7 billion euros of five- and 10-year bonds as well as 2020 debt linked to euro zone inflation later in the day. It will be its last auction of medium- and long-term bonds for 2014, having cancelled remaining sales due to ample cash levels and reduced funding needs.
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