Euro zone debt yields dip as ECB easing bets bolstered
* Downbeat China, euro zone PMIs bolster ECB easing bets
* Euro zone debt yields fall across credit spectrum
* BNP Paribas expects ECB QE in second half of 2014
By Emelia Sithole-Matarise
LONDON, Feb 21 (Reuters) - Euro zone government bond yields fell across the board on Friday as doubts about the strength of the currency bloc's economic recovery bolstered expectations the European Central Bank will ease monetary policy further.
Surveys on Thursday showed business activity within the currency bloc did not expand as much as expected in February, in a sign the economic recovery remained fragile, particularly outside the region's biggest economy, Germany.
Data from China also painted a grim picture of the country's manufacturing sector, raising questions about the outlook for global growth.
"The China and euro zone PMI data wasn't particularly great and that leaves the door open for ECB action," said Alan McQuaid, chief economist at Merrion Stockbrokers.
"This (ECB outlook) is supporting the market. The fact that there's firm demand for Bunds is a reflection that there's still a lot of uncertainty about the state of the global economy."
German 10-year yields were down 3 basis points at 1.67 percent. Belgian, Dutch and Austrian yields also fell. Austrian bonds were supported by Fitch's affirmation of the country's triple-A rating with a stable outlook. Fitch said the government could handle the cost of restructuring nationalised bank Hypo Alpe Adria.
Italian and Spanish yields were dropped 3 basis points to 3.63 and 3.58 percent respectively, both resuming their downward march after bouncing off eight-year lows on Thursday.
Some investors expected Italian yields to ease back to the 3.54 percent trough hit on Wednesday as investors warmed to incoming Prime Minister Matteo Renzi's pledges of ambitious reforms to revive the euro zone's third largest economy.
Renzi, who engineered the resignation of Enrico Letta from the premiership last week, dismissed late on Thursday reports that wrangling with his likely coalition partners was holding up an agreement on a cabinet and said everything would be wrapped up "in a matter of hours".
Some in the market, such as BNP Paribas, said they expected even more aggressive falls in Italian and Spanish yields if the ECB decides in coming months to implement some form of quantitative easing to fend off deflation. Bond and money markets are not pricing in such a move from the ECB.
"We expect the euro sovereign market to start pricing in ECB quantitative easing ... prior to actual implementation of QE in the second half," BNP Paribas strategists said in a note.
"The implications for euro-area sovereign bonds are striking, especially in peripherals. By end-H1, we expect Spain and Italy yields to fall to ... 2.90 percent in 10-year (bonds)."
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