* Spanish Aug inflation at -0.5 pct vs -0.6 pct fcast
* German inflation figures due at 1200 GMT
* Italy sells up to 8 bln euros of five- and 10-year bonds
By Marius Zaharia
LONDON, Aug 28 Euro zone bond yields held at
record lows on Thursday as a drop in Spanish inflation in August
kept pressure on the European Central Bank to ease policy
Spanish inflation came in at minus 0.5 percent, higher than
expectations of minus 0.6 percent but lower than in July. German
inflation due at 1200 GMT was expected to be unchanged at 0.8
Overall, inflation in the euro zone is still sure to remain
far from the ECB's target of just below 2 percent. Data for the
region as a whole is due on Friday and is forecast to slip to
0.3 percent from 0.4 percent.
Such data is increasing speculation that the ECB will
follow in the footsteps of the world's other major central banks
and start pumping money into the flagging euro zone economy via
an asset-buying programme, known as quantitative easing (QE).
In a landmark speech on Friday, ECB President Mario Draghi
highlighted a "significant" fall in euro zone inflation
expectations this month, dropping his strongest hint yet that a
QE programme is possible over the next year.
"For the euro area, inflation may now be 0.3 or 0.4 percent
but I don't think this one figure is of major importance," said
Piet Lammens, a strategist at KBC in Brussels.
"What is important is that Draghi said that during August
inflation expectations have dropped substantially."
German 10-year yields were last a touch lower
on the day at 0.907 percent, just above a record low of 0.896
percent on Wednesday.
Most other euro zone yields were near their record lows,
with Spanish 10-year bonds yielding 2.14 percent
and the Italian ones yielding 2.38 percent.
ECB sources said that the central bank is unlikely to take
new policy action next week unless August inflation figures show
the euro zone sinking significantly towards deflation.
The five-year, five-year forward breakeven rate
- the ECB's preferred measure of what the market
thinks the inflation outlook is - has picked up since Draghi's
speech in Jackson Hole.
The rate, which now shows roughly where investors expect
forecasts of inflation for 2024 to be in 2019, had fallen by
roughly 20 bps in less than a month before those remarks and was
approaching its 2010 record lows of around 1.90 percent. It has
since picked up to a shade above 2 percent.
Other measures still show very low long-term inflation
expectations. Ten-year inflation swaps stand at
1.5 percent, while five-year swaps trade at 1 percent.
Two-year German breakeven rates, derived from the yield gap
between conventional and inflation-linked bonds, are negative.
Ten-year breakeven rates at 1.26 percent are not far from
Japan's 1.18 percent.
Low inflation or deflation may create problems for the euro
zone's lowest-rated economies' efforts to cut their debts.
However, QE prospects make those bonds attractive at this stage
as the market sees the ECB as a likely heavy buyer at any price.
This, coupled with investors receiving coupon payments, is
expected to ensure a smooth sale of up to 8 billion euros in
five- and 10-year Italian bonds (BTPs) later in the day despite
yields being at record lows.
"The BTP market remains firmly supported by various factors,
not least growing expectations of further action by the ECB,"
Citi strategists said in a note.
(Graphics by Vincent Flasseur, editing by Nigel Stephenson)