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Euro zone bond yields fall after dovish ECB minutes, German curve flattens

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07/12/2018 | 05:56pm CEST

LONDON (Reuters) - Government bond yields across the euro area fell on Thursday after minutes from the European Central Bank's last meeting showed the bank will keep rates at record lows for as long as needed, and its rate guidance should be seen as "open-ended."

As German bond yields fell, the gap between two- and 10-year borrowing costs was at its narrowest in over a year.

The ECB guided markets for steady rates "through the summer of 2019" at its June meeting, when it also announced that it would end its 2.6 trillion euro (2.30 trillion pounds) bond-buying programme in December.

But policymakers at the meeting felt a need to stress that rates would move only if inflation continued to rise back towards the bank's target of almost 2 percent, the minutes showed.

That pushed borrowing costs down over the course of afternoon trade, even as U.S. Treasury yields pushed higher <US10YT=RR>.

Ten-year euro zone government bond yields were last down 1-4 basis points.

In benchmark bond issuer Germany, 10-year yields fell 1.5 bps to 0.29 percent <DE10YT=RR> -- moving back within sight of recent five-week lows.

"It's not that surprising to have a rather dovish account given the (ECB President Mario)Draghi speech we had in June," said Cyril Regnat, a fixed income strategist at Natixis.

"What is important and what markets are focusing on is the comments on the downside risks to euro zone growth and inflation."

The fall in German bond yields pushed the gap between two- and 10-year German borrowing costs to 94.5 bps -- the tightest in over a year <DE2YT=RR>.

Italy sold 6.5 billion euros in bonds at an auction.

But upward pressure from new supply faded and Italian bond yields <IT2YT=RR> <IT5YT=RR> <IT10YT=RR> were down 5-6 bps across the curve in late trade, falling with euro zone peers.

Elsewhere, data showed U.S. consumer prices barely rose in June, but the underlying trend continued to point to a steady buildup of inflation pressures that could keep the Federal Reserve on a path of gradual interest rate increases.

The U.S. Consumer Price Index edged up 0.1 percent, after a 0.2 percent increase in May.

(Reporting by Dhara Ranasinghe; Editing by Catherine Evans)

By Dhara Ranasinghe

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