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UPDATE 1-As growth worries mount, German Bund yield lurches closer to zero pct

Kitco News

* Germany Bund yield lowest since late 2016

* Analysts do not rule out move to zero pct

* Italy 10-year yields set for biggest weekly rise since Oct

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices adds move in inflation expectations, comment)

By Dhara Ranasinghe

LONDON, Feb 8 (Reuters) - Long-dated bond yields in Germany were just 10 basis points from zero percent on Friday, holding deep in territory that reflects dire concern in bond markets about economic conditions.

In fact, 10-year bond yields in Germany, France and the Netherlands held close to more than two-year lows at the end of a week that has seen another significant adjustment in investor expectations’ for future growth and central bank policy.

They were pushed in that direction on Thursday after the European Commission slashed its economic growth forecasts for the European Union.

“I think going sub-zero in the 10-year Bund yield would require a pricing in of rate cuts for the ECB (European Central bank) and the threshold for that is still sizeable,” said Nordea chief analyst Jan von Gerich.

“But it does show how the pricing of the economic outlook has deteriorated significantly and shows that the ECB won’t be able to hike rates anytime soon.”

Concern that economic conditions may be worse than anticipated a few months ago has driven yields on safer bonds down. In euro zone benchmark issuer, Germany, that means bonds with maturities out to nine years now yield below zero percent.

Three months ago, German bonds out to six years had sub-zero yields.

“We don’t think a move to zero percent is likely but it could happen,” said Ciaran O’Hagan, rates strategist at Societe Generale, referring to Bund yields, which touched 0.10 percent on Friday.

Deutsche Bank strategist Jim Reid noted that the last time German bond yields were this low, the ECB’s hefty bond-buying stimulus was in “full flow.”

“The last time (French) OAT yields were lower was November 2016 and Dutch yields were last lower also in October 2016, so this isn’t just a Bund story,” he said.

For sure, this week has seen a further leg lower in yields across major bond markets, with the exception of Italy.

British gilt yields hit eight-month lows on Thursday after the Bank of England cuts its growth estimates, Japanese 10-year bond yields on Friday fell to a five-week low and U.S. Treasury yields are down 4 basis points this week in a third week of falls.

A key long-term gauge of market euro zone rate expectations meanwhile fell further on Friday to below 1.46 percent, reflecting increased pessimism about the inflation outlook.

The five-year, five-year breakeven forward, which measures expected inflation over a five-year period that begins five years from today, is down 12 bps in the past month to its lowest level in over two years.

It is tracked closely by the ECB, which targets inflation at close to 2 percent.

Elsewhere, there was some stability in Italy’s bond market, which has taken a beating on concern that a weakening economy will exacerbate the country’s budget deficit.

Italy’s 10-year bond yield dipped to 2.94 percent . Still, it has risen some 20 bps this week — set for its biggest one-week jump since October.

Reporting by Dhara Ranasinghe Editing by Robin Pomeroy and Toby Chopra

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