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Eurozone yields hold near record lows after solid start of QE year

[LONDON] Eurozone government bond yields held near record lows on Monday, consolidating an emphatic start of the year on the back of bets on further monetary policy easing by the European Central Bank.

Expectations that the ECB is about to launch a sovereign bond buying programme, which have so far offset any concerns about the outcome of this month's elections in Greece, could get another boost from German inflation data later in the day.

Germany's harmonised inflation for December is expected to fall to 0.2 per cent on the year from 0.5 per cent in the previous month, paving the way for a negative inflation figure for the entire single currency area on Wednesday.

ECB President Mario Draghi said in an interview published at the start of the year that the risk of the central bank not fulfilling its mandate of preserving price stability was higher now than half a year ago and reiterated his readiness to act. "Inflation figures in Germany will probably be very low and, after the interview of Mr Draghi, they will confirm that quantitative easing is very close," said KBC strategist Piet Lammens, using the specialist term for central bank asset purchases. "It seems there's only one direction (in yields)." Ten-year German yields were little changed on the day at 0.50 per cent, after falling 5 basis points on Friday to a record low of 0.493 per cent.

Other euro zone bond yields were also close to their troughs with Spanish 10-year yields trading around 1.50 per cent, Italian yields just above 1.75 per cent and Portuguese yields just below 2.50 per cent.

Yields on lower-rated euro zone bonds fell 10-25 bps on Friday, showing little signs of 2012-like contagion from Greece's political turmoil.

Greece is holding early elections in late January after parliament rejected Prime Minister Antonis Samaras's candidate for president. The leftist Syriza party, which wants to cancel the austerity measures taken in return for 240 billion euros of loans from the European Union and the International Monetary Fund, leads in the polls.

Der Spiegel magazine cited unnamed government sources on Sunday saying Germany believed the euro zone would now cope with a Greek exit.

Vice Chancellor Sigmar Gabriel said Berlin wants Greece to stay in the euro zone and had no contingency plans to the contrary. He said the eurozone had become more resilient in recent years and could not be blackmailed.

Greek 10-year bond yields were 11 basis points higher at 9.37 per cent.