October 15, 2015 / 4:06 PM / 2 years ago

UPDATE 1-Bund yields near two-week lows after ECB policymaker's comments

* ECB policymaker signals more easing

* German bonds protected from U.S. inflation surprise

* Portuguese debt lags on political uncertainty (Adds U.S. data, updates prices)

By Marius Zaharia and John Geddie

LONDON, Oct 15 (Reuters) - The prospect of more European Central Bank easing kept German yields near two-week lows on Thursday, even as the United States posted stronger-than-expected core inflation.

ECB governing council member Ewald Nowotny, who is also Austria's central bank governor, said new efforts were needed to boost consumer prices in the euro zone, which should include both structural reforms and measures to strengthen demand.

The comments, which add to growing expectations that the ECB could ramp up its trillion-euro bond-buying programme, weakened the euro and pushed Bund yields, the benchmark for European borrowing costs, down to two-week lows of 0.528 percent.

Yields rose briefly after data showed that in the 12 months through September, core inflation in the United States rose the most since July 2014, supporting the case for a rise in U.S. interest rates.

But focus quickly returned to the potential for easing in Europe. At 1445GMT, Bund yields were 1 basis point higher at 0.55 percent. U.S. equivalents were up 4 bps at 2.03 percent.

"The comments from Nowotny have given protection to the Bund market from the data we have had from the United States," said David Keeble, Credit Agricole's global head of fixed income strategy.

Economists polled by Reuters expect the ECB to extend its quantitative easing programme beyond September 2016, but were less decided on whether it would spend more than the current 60 billion euros a month.

Euro zone money markets are discounting about a 50 percent chance of a deposit rate cut in the coming year, even though ECB President Mario Draghi said a year ago official interest rates cannot move any lower.

"The market is concerned about the growth outlook globally and this morning we get comments from the ECB that were very dovish," said Jussi Hiljanen, head of fixed income research at SEB.

"You definitely can't rule out another cut in the deposit rate ... and the market has also moved to discount a quite high probability that the QE programme could be extended."

In primary markets, Spain sold 4 billion euros in 2018, 2025 and 2030 bonds in an auction that drew strong demand at lower borrowing costs. The government has now sold around 89 percent of its end-of-year target for medium- and long-term issuance.

Economy Minister Luis de Guindos said on Thursday the government will lower its net debt issuance target for this year to 48 billion euros from 51 billion. The target had already been reduced from 55 billion euros.

Rabobank strategists said the plans reflect Spain's strengthening economy, which may warrant a rating upgrade from Moody's on Friday. Moody's current rating is Baa2.

Rival agency Standard & Poor's raised Spain's rating to BBB+ from BBB two weeks ago.

France also sold bonds on Thursday.

Portuguese bonds continued to underperform. The country has yet to form a government after the Oct. 4 elections. Ten-year yields were up 2 bps at 2.48 percent.

President Anibal Cavaco Silva will meet Portugal's main parties for consultations on forming a new government on Oct. 20 and 21. (Reporting by Marius Zaharia and John Geddie; Editing by Larry King)

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