UPDATE 1-Euro zone bond yields hold near multi-year lows on ECB rate tiering talk

Core euro zone government bond yields held near multi-year lows on Thursday as speculation mounted that the ECB would introduce a tiered deposit rate to ease strains on banks amid continued low economic growth.

European Central Bank chief economist Peter Praet told Bloomberg that ECB staff were examining the issue of tiering, but that it was premature to talk of its introduction. Expectations of rate tiering fuelled a huge rally in euro zone government bonds on Wednesday, after a comments from ECB President Mario Draghi boosted talk that the ECB may be considering steps such as a tiering of interest rates to ease pressure on banks.

The move south gathered momentum after a Reuters report that the ECB is looking at ways to cut the charges banks pay on their excess cash to offset the side-effects of sub-zero rates. Expectations of more accommodative monetary policy saw German bond yields hold-near record lows after falling seven basis points a day earlier, while other core euro zone bond yields were about one basis point higher.

In a further sign that markets are concerned the ECB will not be able to meet its inflation target, a key market gauge of long-term euro zone inflation expectations fall to its lowest since September 2016 and within sight of record lows. . The five-year, five-year forward, an inflation gauge tracked by the ECB, fell to around 1.31 percent EUIL5YF5Y=R its lowest since September 2016. It is down some 10 basis points this week alone.

While the ECB itself watches the five year, five year forward, Jan von Gerich, rates strategist at Nordea pointed out that Draghi on Wednesday said it illustrates a fall in the inflation risk premia, rather than the expectation that inflation will actually fall to that level. Nevertheless, it reflects growing concern the ECB will be unable to meet its inflation target.

"It's an absolutely crazy environment," said Brian Giuliano, vice president of portfolio management for fixed income at Brandywine Global in Philadelphia. "On the ECB, I get why they are talking about LTROs, I get why they are talking about a dovish pivot in pushing out rate hikes," he said. "Should we be cutting rates now? I don't think it's that dire in the euro zone."

Germany's 10-year bond yield, the benchmark for the region, was last up around half a basis point on the day to -0.076 percent, while its five-year yield, which on Wednesday recorded its biggest one-day fall in almost two years, was up one basis point on the day to -0.48 percent. Data released later in the session did little to lift the mood either. Euro zone economic sentiment eased more than expected in March, mainly because of a deteriorating mood in industry and services, European Commission data showed on Thursday.

Further downward pressure on safe-haven assets may also be coming from concerns over Britain's EU exit. The British parliament on Wednesday failed to reach an agreement on the progress of Brexit, rejecting all eight alternative options. Ten-year Gilt yields fell 4.4 basis points lower to 0.973 percent.

In keeping with the move into quality assets, 10-year peripheral bond yields were up to 6 bps higher, with Italian yields rising the most following a 7.5 billion bond sale. Italy's 10-year yield was last up eight basis points to 2.519 percent.

(Reporting by Virginia Furness; Editing by Angus MacSwan)