UPDATE 1-Euro zone yields drop on hopes of comforting words from ECB

Euro zone government bond yields fell on Thursday as hopes grew the European Central Bank would respond to a slowing economy with dovish comments, particularly after a business survey showed euro zone growth was little changed at the start of 2019. Business activity across the euro zone barely expanded at the start of the year. Growth was at a low not seen since the middle of 2013, a survey showed on Thursday.

France's 10-year borrowing cost hit a one-year low after a particularly poor French reading that showed its business activity the weakest in over four years. Many were hoping the ECB would acknowledge slowing growth by changing the language in its statement, though some believe that will come only in March.

A change in the statement would not be a change in policy, but it would signal that the ECB is proceeding even more cautiously in withdrawing years of stimulus. "We think the ECB might be changing its tone a little bit from saying the risks to the growth outlook are broadly balanced to saying the risks to the growth outlook are tilted to the downside," said Wouter Sturkenboom, chief investment strategist for EMEA and APAC, Northern Trust Asset Management.

"This will push out ECB rate hike expectations even further which will keep a lid on yields to the downside as well," he said. Money market pricing suggests investors are pricing in only about a 45 percent chance the ECB will raise rates this year.

Euro zone bond yields fell 1 to 3 basis points, with German 10-year yields -- the benchmark for the region -- down a basis point to 0.21 percent, a one-week low. French 10-year yields dropped 2 basis points to its lowest level since December 2017 at 0.608 percent.

A key market gauge of euro zone inflation expectations, the five-year five-year forward inflation swap, dropped to a seven-month low at 1.5274 percent. CHEAP LOANS Market analysts also believe ECB President Mario Draghi may hint at cheap loans to banks, under a programme known as the long term refinancing operation (LTRO). That would help short-dated southern European government bond yields. Banks in the region are most likely to make use of LTROs and ramp up purchases of short-dated debt of their governments, a popular trade the last time LTRO was used.

Italy's two-year bond yield was an outperformer, with yields dropping 5 bps to 0.31 percent, close to the over six-month low hit last week. (Reporting by Abhinav Ramnarayan, Graphic by Dhara Ranasinghe, editing by Larry King)