* Euro zone bond yields lower across the board
* German 10-yr yields hover near six-month lows
* European stocks down 0.8 pct after opening higher
* Italy yields drop after strong CTZ auction
* German bond yields edge lower to 0.24 pct
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds detail on Italian auctions, U.S. stocks, updates prices)
By Abhinav Ramnarayan
LONDON, Dec 27 (Reuters) - Euro zone borrowing costs dropped across the board on Thursday, as an early boost to stock markets lost steam entirely as the session wore on, sending investors back towards the safety of government debt.
Severe stock market volatility has boosted demand for government bonds in recent months, sending the yield on German 10-year debt — seen as one of the safest and most liquid assets in the world — to a six-month low of 0.20 percent last week.
And more volatility this week has kept those yields pinned near those levels. On Thursday, Germany’s 10-year borrowing costs dropped to 0.22 percent at one stage before settling at 0.225 percent by the close, down 2.5 basis points on the day.
Other high-grade euro zone bond yields — such as those of Austria and the Netherlands — were also 1-3 basis points lower on the day.
“I think we are seeing a re-allocation of fund flows from equities to bonds in the U.S. and that’s keeping European yields lower as well,” Mizuho strategist Antoine Bouvet said.
Ten year U.S. Treasury yields dropped 5 bps to 2.75 percent on Thursday.
“I don’t think the current yield (on German debt) sustainable in the longer term given how the supply picture is going to change,” he added, referring in part to the end of the European Central Bank bond-buying scheme, effective at the end of this year.
Global stocks hit a two-year trough on Christmas Eve, but a dramatic surge in U.S. stocks on Wednesday — the Dow Jones Industrial Average notched its biggest point surge — and its subsequent effect on Asian and European shares had some hoping the market had bottomed out.
Yet, as Thursday rolled on, the market changed direction again and a pan-European stock index was lower 2 percent by the close.
And when Wall Street opened, the Dow Jones Industrial Average shed nearly half of the record breaking gain in the previous session after data showed consumer confidence in December fell to its lowest level since July.
Meanwhile, Italian government bond yields cancelled out an early rise and were lower nearly 10 bps by the close after a strong auction of zero coupon bonds boded well for a sale of more conventional debt due Friday.
Early on Thursday, concerns over Banca Carige — which had a cash call blocked by its largest shareholder — had pushed the Italy 10-year bond yield spread over Germany wider, but by the close it was tighter 8 bps on the day at 252 bps. (Reporting by Abhinav Ramnarayan; Editing by Alison Williams)