December 5, 2017 / 12:10 PM / a year ago

UPDATE 2-ECB QE data offers further incentive to snap up euro zone bonds

* ECB buys less German debt, more Italian, French in November

* Data underpin tightening in peripheral spreads, analysts say

* November final euro zone composite PMI 57.5

* Euro zone periphery govt bond yields (Updates prices)

By Dhara Ranasinghe

LONDON, Dec 5 (Reuters) - Euro zone bond yields crept lower on Tuesday after the European Central Bank released its latest bond-buying data and confirmed a front-loading of asset purchases before the end of the year.

Increased buying by the ECB, a winding down of new bond supply and further signs of strength in the euro zone economy all provided a favourable backdrop to regional debt markets, especially lower-rated ones in southern Europe, analysts said.

ECB data released on Monday showed France and Italy each enjoyed purchases that were nearly a billion euros above their “capital key” at 10.439 billion euros and 9.077 billion euro .

The capital key is the method by which the ECB buys government bonds for its stimulus in relation to the size of the economy of each member state. The ECB also said it will not purchase bonds as part of its stimulus package from Dec. 21 to Dec. 29, expecting market liquidity will drop sharply around the Christmas holidays.

Citi said the cumulative front-loading of ECB bond buying is 10.77 billion euros, implying potentially 49.2 billion euros of net purchases in December.

To achieve that target, the weekly pace will probably have to go up to 17.2 billion euros from a November average of 14.93 billion for the next two weeks before falling to 10.3 billion euros in the third week of December, Citi analysts said.

“That implies strong support for euro zone government bonds from front-loading for two more weeks, particularly (French) OATs and (Italian) BTPs where buying has continued above the capital key and supply is light,” they said in a note.

On Tuesday, euro zone bond yields were flat to 2 basis points lower on the day, with benchmark German 10-year government bonds 1.5 bps down to 0.32 percent.

Italy’s 10-year government bond yield edged lower to 1.71 percent.

The gap over benchmark German Bund yields was around 138 basis points. It earlier narrowed to the almost 136 bps hit last month, the lowest since October 2016.

“We have PSPP (Public Sector Purchase Programme) buying, no issuance coming up, so everything points in the direction of lower yields,” said Antoine Bouvet, rates strategist at Mizuho.

“The economic picture is also positive and that is favourable for a tightening of spreads in the periphery.”

HIS Markit’s final composite Purchasing Managers’ Index for the euro zone, seen as a good guide to growth, matched an earlier flash reading of 57.5, up from October’s 56.0 . After last week’s unexpected surge in a key overnight benchmark rate European banks use to lend money to each other, analysts said they would be closely watching the ECB’s one-week main refinancing operation on Tuesday for any signs of distortions in the market.

Reporting by Dhara Ranasinghe, editing by Catherine Evans, Larry King

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