Eurozone bonds broadly edged higher on Friday, extending this week's rise after a surprisingly sharp slowdown in euro zone inflation raised expectations that the European Central Bank may ease monetary policy further. October inflation fell to 0.7 percent from 1.1 percent the previous month, well below the ECB's target of just under 2 percent, data on Thursday showed. The shock was so great that it overshadowed a Federal Reserve statement that was perceived as less dovish than anticipated.
Short-term euro zone inflation gauges as measured by French breakeven rates, the yield spread between euro zone inflation-protected government bonds and equivalent nominal debt, have plumbed to July lows since the report.
Two-year Spanish yields fell 6 basis points to 1.09 percent, while equivalent Italian yields dropped 5 bps to 1.39 percent. Their 10-year counterparts fell by 2 bps to 4.02 and 4.11 percent, respectively.
In core euro zone bonds, German two-year yields, were 1 bp lower at 0.11 percent, their lowest since August 1, steepening the 2- to 10-year yield curve by 3 bps to 158 bps. Bund futures closed 15 ticks lower at 141.85, having hit a two-month peak of 142.32 on Thursday.
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