By David Gaffen
NEW YORK (Reuters) - U.S. and European bond markets rallied and benchmark yields fell to multi-month lows on Wednesday in expectations of stimulus from the European Central Bank next week and on month-end buying from U.S. funds.
Stock markets were largely flat. Wall Street dipped slightly after the benchmark S&P 500 .SPX set a closing record on Tuesday. The MSCI World Index .MIWD00000PUS was up fractionally to 420.27 points, less than 2 percent from its lifetime high.
European markets digested new credit and bank lending figures from the European Central Bank that bolstered the case for interest rate cuts next week.
The yield on the U.S. 10-year note fell to a 10-month low at 2.447 percent, as the bond rose 19/32 in price, while the yield on the 30-year bond hit an 11-month low. Investors have been buying long-dated debt in tandem with declines in European yields and as reduced Federal Reserve purchases of bonds are expected to increase the duration in indexes followed by many bond fund managers.
"The month-end extensions are part of the rally, and the word is it's larger than usual," said Jeffrey Young, interest rate strategist at Nomura Securities in New York.
German two-year bond yields, the most sensitive to ECB interest rate moves, hovered at a 6-1/2-month low and Spain's hit record lows. The DAX stock index .GDAXI did a little better than Europe's other main markets .FTEU3, adding a few more points to Tuesday's record high. .EU
The ECB's lending data showed credit to companies fell 1.8 percent on an annual basis in April. The decline was less than the prior month, but was still evidence of sluggish lending in the euro zone.
The data reinforce the case for a reduction in the ECB's base rate, already at a record-low 0.25 percent, said Jan von Gerich, chief developed markets strategist for Nordea in Helsinki, but markets may need bolder action to rise further.
The Dow Jones industrial average .DJI fell 16.83 points, or 0.1 percent, to 16,658.67; the S&P 500 .SPX gained 1.07 points, or 0.06 percent, to 1,912.98; and the Nasdaq Composite .IXIC dropped 0.68 points, or 0.02 percent, to 4,236.39.
The dollar shrugged off the slide in U.S. Treasury yields to below 2.50 percent. The dollar held near an eight-week high against a basket of major currencies and fetched 101.76 JPY= against the yen, within striking distance of the two-week high of 102.145 seen on Tuesday. The euro fell to $1.3598 against the dollar.
Brent crude LCOc1 was modestly lower, falling 38 cents to $109.64 a barrel.
Gold extended overnight losses to a 3 1/2-month low. Spot gold XAU= slipped to $1,257.20 an ounce. GOL/
(Editing by Leslie Adler)