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Euro zone bond yields slip; German GDP falls more than expected

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

LONDON, May 25 (Reuters) - A lessening of inflation fears saw euro zone government bond yields edge down for the third day in a row on Tuesday, as the market continued to calm down from last week’s sell-off.

Last week, Germany’s 10-year Bund yield rose to two-year highs, while Italian yields rose to their highest since September, as investors bet stronger economic growth could prompt the European Central Bank to slow the pace of its emergency bond purchases soon.

But yields started falling on Friday when ECB President Christine Lagarde said it was still too early for the ECB to discuss tapering the stimulus.

The German economy shrank more than expected in the first quarter as coronavirus-related restrictions spurred householders to put more money than ever into savings, data showed on Tuesday.

Core yields were down around 2 basis points (bps) in early London trading. Germany’s benchmark 10-year Bund yield was at -0.154% at 0714 GMT, its lowest in 13 days.

Italy’s 10-year yield dropped below 1% for the first time since May 13, and was down 2 bps at 0.9984%.

U.S. Treasury yields likewise were a touch lower after Federal Reserve officials made dovish comments, affirming support for keeping monetary policy unchanged.

Germany’s Ifo business climate survey for May is due at 0800 GMT and is expected to show improvement.

“Today’s data flow should stay upbeat with the Ifo set for another improvement. Importantly, unlike in previous months the service and trade sectors should drive the uptick this time, reflecting hopes of a far-reaching easing of the current COVID restrictions in view of falling infection rates,” wrote Michael Leister, head of interest rate strategy at Commerzbank in a note to clients.

ING strategists wrote in a note that euro zone bond markets are more able to withstand good economic news because of technical factors such as light supply and it being near the end of the month.

ECB chief economist Philip Lane is due to speak at 1400 GMT, with investors looking for any clues about what the central bank might do at its meeting on June 10. (Reporting by Elizabeth Howcroft. Editing by Mark Potter)

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