German Bund yield slides back below 0%; ECB divided on inflation

Jan 20 (Reuters) - Benchmark German bond yields fell for the first time in five sessions and moved below 0% on Thursday as money markets slightly pulled back their bets on rate hikes and the European Central Bank appeared divided on the inflation outlook.

After rising as high as 0.025% on Wednesday, Germany's 10-year yield was down nearly 2 basis points (bps) to -0.03% by 1600 GMT.

Other 10-year benchmark government bond yields in the bloc were also down about 2 bps on the day.

During morning trading, European Central Bank (ECB) President Christine Lagarde told France Inter radio that inflation would decrease gradually over the course of the year but said the bank was ready to take any measures necessary to bring the pace of price increases down.

At midday, minutes from the ECB's December meeting revealed deep divisions over the inflation outlook, with a number of the 25 policymakers arguing that inflation was at risk of overshooting expectations.

Policymakers saw a risk that inflation could get stuck above target and argued that the bank should be equally open to tightening or easing policy.

The euro zone central bank cut the amount of stimulus it is pumping into the economy at the December meeting but extended its bond-buying until at least late 2022. The decision was not unanimous.

Money markets pared back bets on rate hikes from the ECB this year slightly, pricing in about an 80% chance of 10-basis point rate hike by September, down from a 100% chance on Wednesday.

Euro zone bond yields have surged and markets have ramped up bets on ECB rate hikes in January, mainly following moves in the United States, even as ECB projections and policymakers suggest it is unlikely to raise rates this year.

Investors are betting the Federal Reserve will hike rates four times this year starting in March and the bank may also start winding down its $8 trillion-plus balance sheet.

An exception to Thursday's fall in yields was Greece, where the 10-year yield was last up 2 bps to 1.7%, a new high since May 2020, following the country's 10-year government bond sale on Wednesday.

The deal saw far less demand than last year as the end of the ECB's pandemic emergency bond purchases looms in March.

Elsewhere, France and Spain were in the primary market with auctions.

($1 = 0.8805 euros) (Reporting by Yoruk Bahceli; additional reporting by Julien Ponthus; Editing by Susan Fenton, Pravin Char and Alex Richardson)