* Euro zone inflation 0.5 pct in March vs 0.6 pct fcast
* Peripheral yields stay near multi-year lows
* Bund yields rise as investors turn cautious ahead of ECB
* ECB expected to hold fire on Thursday, may ease later
(Updates with euro zone inflation data, comments)
By Marius Zaharia
LONDON, March 31 Lower-rated euro zone bond
yields held near multi-year lows on Monday, with a drop in euro
zone inflation keeping speculation rife that the European
Central Bank may loosen monetary policy further later this year.
Euro zone inflation slowed to 0.5 percent in March from 0.7
percent the previous month and compared with expectations of a
0.6 percent reading in a Reuters poll. Markets had already been
positioned for a below-forecast figure after subdued inflation
numbers from Spain and Germany on Friday.
The ECB is not expected to cut interest rates at its monthly
meeting on Thursday, a Reuters poll showed. But
an inverted money market curve points to some expectation that
it could eventually ease monetary policy.
Even if the ECB does not ease policy, it is likely to keep
rates at record lows for a long time to bring inflation back
towards its target of just below 2 percent.
That would keep yields on top-rated euro zone debt at
ultra-low levels, pushing investors towards lower-rated bonds as
they try to maximise returns.
Italian 10-year yields were flat on the day at
3.31 percent, having hit an 8-1/2 year low of 3.261 percent on
Friday. Spanish yields fell 1 bps to 3.23 percent,
just off an eight-year low of 3.20 percent.
Portuguese yields fell 2 bps to 4.03 percent,
having dipped below 4 percent for the first time in four years
on Friday. Irish yields were 4 bps off their record
low of 2.974 percent.
HUNT FOR YIELD
"The numbers point to low (rates) for longer from the ECB,
which is an environment in which the periphery should flourish
because everybody is hunting for yield," said Marius Daheim,
chief strategist at Bayerische Landesbank.
German Bund yields, the benchmark for euro
zone borrowing costs, rose 3 bps to 1.58 percent, having fallen
to two-week lows of 1.51 percent on Friday.
Traders attributed the move, which was counterintuitive
given the low inflation, to investors booking profits on last
week's rally as they cautiously positioned for the ECB meeting.
Some also pointed to comments on Saturday by ECB policymaker
and Bundesbank chief Jens Weidmann that the euro zone was not in
a deflationary cycle and that the ECB should not over-react to a
slowdown in inflation which should prove
Market participants said that marked a change in tone from
last week, when he said negative rates were an option to temper
euro strength and that buying loans and other assets from banks
to support the zone's economy was not out of the question.
Money markets, the best gauge of expectations of what the
ECB is likely to do, pointed to little chance the ECB would ease
monetary policy on Thursday. Forward overnight euro zone
bank-to-bank Eonia rates dated for April were 0.175 percent,
only 2 bps below the spot Eonia rates.
Eonia rates dated October through December were around
0.13-0.14 percent, indicating that the market sees an increasing
chance of ECB easing towards the end of the year.
"There's definitely some expectation that they will do
something further down the line," ICAP strategist Philip Tyson
said. "That sort of (inflation) number does keep the pressure on
the ECB to act."
(Editing by Gareth Jones)