Sept 22 (Reuters) - Euro zone government bond yields fell on Friday as economic data showed a contraction in economic activity, which might lead European Central Bank hawks to soften their policy stance.
The HCOB France flash purchasing managers index (PMI) for the services sector fell to a 34-month low in September, well below a Reuters forecast, while the German PMI rose to 46.2 but below the 47.2 forecast by economists.
A survey showed that the euro zone economy will likely contract in the third quarter.
"PMI data were mixed, and overall, the euro area did a bit better than expected," said Joost van Leenders, senior investment strategist at Van Lanschot Kempen.
"They were still consistent with expectations for economic stagnation or negative growth, which supports expectations that the central bank is done with rate hikes," he added.
Bund yields remained within striking distance of the 12-year high they hit the day before as European Central Bank policymakers have warned of risks of an additional rate hike.
Euro zone inflation is stubbornly high with upside risks, so the ECB's next move could still be a rate increase before cuts come onto the agenda, several policymakers said on Thursday.
ECB policy dove Philip Lane said on Friday companies were finally absorbing wage pressures, and the labour market has started to soften, suggesting inflation pressures from employee pay rises are finally subsiding.
Fixed-income markets reacted moderately to the Federal Reserve and the Bank of England (BoE), which kept rates unchanged, reiterating that more hikes could come.
Germany's 10-year government bond yield, the benchmark for the euro area, dropped 3 basis points (bps) to 2.73% after hitting the day before 2.779%, its highest level since July 2011.
Money markets slightly scaled back their expectations for an additional rate hike by January 2024 to around 25% from 30% the day before.
The Bank of Japan (BoJ) maintained ultra-low interest rates on Friday and a pledge to keep supporting the economy until inflation firmly reaches its 2% target, suggesting it was in no rush to phase out its massive stimulus programme.
Japanese investors hold large amounts of foreign debt, and some analysts worried they might reduce their exposure to Europe if domestic assets become more attractive with a BoJ tightening of monetary policy.
Italy's 10-year government bond yield, the benchmark for the euro area's periphery, fell 3 bps to 4.52%.
The spread between Italian and German 10-year yields – a gauge of market sentiment towards the euro area's most indebted countries – was at 180 bps after recently hitting its widest level in 3-1/2 months at 180.9 bps.
Spain's gross domestic product grew 0.5% in the second quarter, confirming a faster and more robust economic rebound. (Reporting by Stefano Rebaudo, editing by Philippa Fletcher)
