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Eurozone yields near record lows as inflation expectations drop

[LONDON] Most eurozone bond yields held near their record lows on Friday with a measure of the market's long-term inflation expectations falling to one-month lows and feeding ongoing speculation of further European Central Bank easing.

The drop in inflation expectations as measured by the euro five-year, five-year breakeven forward - which now shows where markets expect 2024 price growth forecasts to be in 2019 - comes after business activity data missed forecasts on Thursday.

The instrument, which is closely watched by the ECB to gauge its credibility in the market, last traded just over 1.80 per cent, its lowest since Oct 24, according to Reuters data.

It has completely reversed a rise in the past few weeks to almost 1.90 per cent on the back of stronger hints from ECB policymakers that future monetary policy easing measures may include government bond purchases. "A renewed slide in inflation expectations is lending support to bond bulls," Commerzbank strategists said in a note, referring to investors who bet on bond yields falling further.

German 10-year Bund yields, which set the standard for borrowing costs in the region, were a shade lower at 0.795 per cent, around 8 basis points above record lows.

Equivalent Spanish yields were 3 bps down at 2.07 per cent, versus record lows of 2.045 per cent. Italian yields traded at 2.269 per cent versus a trough of 2.255 per cent.

On Thursday, Markit's Composite Flash Purchasing Managers'Index for the euro zone, which is seen as a good growth indicator, fell to 51.4 in November, missing the lowest forecast in a Reuters poll.

ECB President Mario Draghi and Bundesbank chief Jens Weidmann are due to speak later in the day.