* French business activity contracts as lockdowns bite
* Yields lower a basis point across the board
* ECB expected to extend QE by year end
* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr
LONDON, Oct 23 (Reuters) - Euro zone bond yields inched lower as a key set of business surveys in France and Germany showed the extent of the impact of the second wave of COVID-19 infections in the bloc's two biggest economies.
France, which has been particularly badly hit by a resurgence of cases of the novel coronavirus, saw business activity contract in October, according to the monthly purchasing managers' index (PMI) survey.
Germany's PMI survey showed that its manufacturing sector - known as the engine room of Europe - rebounded strongly, but its services sector was in contraction in a two-tier economy.
"It's not surprising given the local restrictions imposed in major cities in France and elsewhere, and majority of investors are expecting more action from the ECB by the year end," said Commerzbank rates strategist Rainer Guntermann.
He said he expects the central bank to announce an extension of its asset purchase programme by the end of the year and a more flexible application of it.
German 10-year bond yields, the benchmark for the bloc, inched lower to -0.57% while French 10-year borrowing costs dropped a similar amount to -0.29%.,
Both bond yields are coming off one-week highs hit on Thursday; but overall euro zone rates remain close to their lowest levels since March as investors expect the ECB to ramp up stimulus to counter a gloomy economy.
Italian 10-year bond yields dropped slightly to 0.79% ahead of a ratings review by S&P Global due Friday evening, suggesting that the market is confident that a downgrade is not imminent.
"Continued ECB support and record-low yields are good enough reasons for the rating agency to avoid attracting some unfavourable attention," ING analysts said in a note. (Reporting by Abhinav Ramnarayan; Editing by Christopher Cushing)
