UPDATE 1-Euro zone bond yields slip; Germany 5-year auction meets low demand

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices, adds comments, adds chart)

LONDON, June 2 (Reuters) – Euro zone government bond yields slipped one to two basis points in early trading on Wednesday, and a key gauge of inflation expectations fell as markets focused on the European Central Bank meeting next week.

Yields were little changed overall on Tuesday, even after HICP data showed euro zone inflation rose to 2% in May – a sign that markets were confident the European Central Bank would not decide to slow the pace of its bond buys when it meets on June 10.

The ECB has said a near-term rise in inflation is driven by one-off factors and long-term price pressures remain subdued, meaning stimulus will still be needed. Yields have fallen in the last week in response to dovish comments from ECB officials.

At 1045 GMT, Germany’s benchmark 10-year yield was down 2 basis points at -0.19%.

Italy’s 10-year yield was down by 1 basis point at 0.8956%, heading towards Tuesday’s low point of 0.876%, which was the lowest in more than three weeks.

A gauge of the market’s long-term euro zone inflation expectations – the five-year, five-year breakeven forward – was at 1.5777%.

In the previous session, it rose to 1.61%, its highest in nearly two weeks, as oil prices topped $70.

“Especially with core HICP in line with expectation and expected to stay below 1% in coming months, inflation fears seem contained for now with breakevens not widening despite firm oil prices,” wrote Commerzbank rates strategist Michael Leister in a note to clients.

In a quiet day for economic data, markets will pay attention to any comments from central bank speakers.

ECB President Christine Lagarde will speak at an awards ceremony at 1710 GMT.

Germany sold 3.316 billion euros ($4.04 billion) of its five-year government bond, seeing the lowest demand since April 2020, Refinitiv IFR said.

On Tuesday, the European Commission said it would borrow about 80 billion euros of long-term bonds this year to finance the 750 billion euro NextGenerationEU fund to support the recovery.

“The fact that governments have loosened the fiscal purse strings and the NGEU funding vehicle will deploy an important additional boost would, in our view, help limit the scars left by the crisis as opposed to setting the economy on an inflationary breakout,” wrote Rabobank strategists in a note to clients.

($1 = 0.8214 euros)

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