* Germany Bund yield lowest since late 2016
* Analysts do not rule out move to zero pct
* Italy 10-year yields set for biggest weekly rise since Oct
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr
By Dhara Ranasinghe
LONDON, Feb 8 (Reuters) - Yields in the euro zone’s top-rated government bond markets held close to their lowest levels in over two years on Friday, at the end of week that saw another significant adjustment of investors’ expectations of world economic conditions.
Germany’s benchmark 10-year bond yield is just 10 basis points away from zero percent and is now in territory that in bond markets reflects dire concern about economic conditions.
It was pushed in this direction on Thursday after the European Commission slashed its economic growth forecasts for the European Union.
“The level on German Bund yields suggests a very pessimistic economic outlook, especially in Europe where we also have political concerns,” said Ciaran O’Hagan, rates strategist at Societe Generale.
“We don’t think a move to zero percent is likely but it could happen.”
Concern that economic conditions may be worse than anticipated a few months ago has driven yields on safer bonds down. In euro zone benchmark issuer, Germany, that means bonds with maturities out to nine years now yield below zero percent.
Three months ago, German bonds out to six years had sub-zero yields.
As German Bund yields hit fresh lows, 10-year bond yields in France and the Netherlands held near their lowest levels since late 2016.
The move in these higher-rated or “core” euro zone bond markets reflects a broader trend in world markets as investors bet weak economic conditions will prevent central banks from tightening monetary policy any time soon.
British gilt yields hit eight-month lows on Thursday after the Bank of England cuts its growth estimates, Japanese 10-year bond yields on Friday fell to a five-week low and U.S. Treasury yields are down 5 basis points this week in a third week of falls.
There were some signs of stability in Italy’s bond market, where yields edged lower after sharp increases this week.
In contrast to much of the bloc, weak Italian data has fanned worries about a deterioration in public finances — putting upward pressure on bond yields.
Italy’s 10-year bond yield was marginally lower at 2.94 percent on Friday. Still, it has risen some 20 bps this week — set for its biggest one-week jump since October.
Reporting by Dhara Ranasinghe Editing by Robin Pomeroy