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UPDATE 2-Euro zone bond yields fall to 13-day low with ECB reassurances

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds details, updates prices)

LONDON, May 25 (Reuters) - Euro zone government bond yields continued to edge down on Tuesday, as further dovish comments from European Central Bank policymakers supported bond prices.

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 pandemic emergency bond purchases (PEPP) soon.

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

ECB policymakers gave further dovish signals on Tuesday, with Greek central bank governor Yannis Stournaras not seeing any reason to change the bank’s bond-buying programme. His French counterpart, Francois Villeroy de Galhau, said the bank had plenty of time to map out its exit from PEPP and could be more flexible about buying under its conventional bond buying programme after that.

Germany’s benchmark 10-year Bund yield was down 2 bps at -0.158% at 1457 GMT, its lowest since May 12.

Italy’s 10-year yield dropped below 1% for the first time since May 13, and was last down 5 bps to 0.97%.

The 10-year Dutch bond edged into negative territory for the first time since May 12.

“The ECB tapering expectations eased off and in turn that should see spreads tighten. We think euro zone bonds will outperform those in the U.S. and UK based on a more dovish ECB,” said Peter McCallum, rates strategist at Mizuho.

“We generally think yields are going to go higher as the summer data shows positivity in Europe, but with the ECB support in the near-term we’d probably be long for this week,” he added.

ECB rate-setters will review the pace of emergency bond purchases at their June 10 meeting against an improved economic backdrop. Growth and inoculation rates are rising in the bloc as COVID-19 cases fall.

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.

Germany’s Ifo survey showed that business morale improved more than expected in May - but the data did not affect bonds.

ING strategists wrote in a note to clients that euro zone bond markets were more able to withstand good economic news because of technical factors such as light supply and it being near month-end, when funds tend to rebalance their portfolios. (Reporting by Elizabeth Howcroft, additional reporting by Yoruk Bahceli; Editing by Mark Potter and Bernadette Baum)

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