UPDATE 2-Euro zone yields tumble as weak PMI lifts hopes for comforting ECB

Euro zone bond yields tumbled on Thursday on growing hopes that the European Central Bank will later this session soothe concerns about a weakening economy, especially after a survey showed business growth all but stalled at the start of 2019. The IHS Markit Flash Composite Purchasing Managers' Index sank to 50.7, its weakest since July 2013, from 51.1 in December. That was below even the most pessimistic forecast in a Reuters poll where the median expectation was for a modest rise to 51.4.

France's 10-year borrowing costs hit their lowest level since September 2017 at 0.60 percent after a particularly poor French PMI reading that showed its business activity the weakest in over four years. Spanish and Italian 10-year bond yields fell to six-month lows at 1.25 percent and 2.67 percent respectively

Focus was on the ECB, which releases a statement from its policy meeting at 1245 GMT -- followed by a news conference at 1330 GMT. "In terms of monetary policy there really is very little left in the bank's armoury and yet despite its efforts, economic data in the euro zone appears to be deteriorating," said Rachel Winter, senior investment manager at Killik & Co.

"Investors are waiting to see what else, if anything, the bank has up its sleeve." 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 markets price about a 45 percent chance the ECB will raise rates this year.

Euro zone bond yields fell as much as six basis points, with German 10-year yields down 2.5 bps at 0.20 percent, its lowest in over a week. 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 7 bps to 0.28 percent, close to the over six-month low hit last week.

(Reporting by Abhinav Ramnarayan,Additional reporting by Sujata Rao and Dhara Ranasinghe, editing by Larry King and Jon Boyle)