UPDATE 2-Euro zone bond yields slip, German 5-year auction meets low demand

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

LONDON, June 2 (Reuters) – Euro zone government bond yields and a gauge of inflation expectations fell on Wednesday as markets focused on the European Central Bank meeting next week.

Yields held below recent highs, a day after data showed euro zone inflation rose to 2% in May. This signaled confidence 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 recently after a sharp rise in early May in response to dovish comments from ECB officials.

At 1458 GMT, Germany’s benchmark 10-year yield was down 2 basis points at -0.19%.

Italy’s 10-year yield was down nearly 2 basis points to 0.89%, a touch above heading Tuesday’s three-week low at 0.876%.

A gauge of the market’s long-term euro zone inflation expectations – the five-year, five-year breakeven forward – fell to below 1.56% after rising to 1.61% in the previous session, its highest in nearly two weeks, as oil prices topped $70. .

“Especially with core (inflation) 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, referring to a narrower inflation reading which strips out food and energy costs, which the ECB also monitors.

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.

In the primary market, Germany sold 3.316 billion euros ($4.04 billion) of its five-year government bond, which saw the lowest demand since April 2020, according to Refinitiv IFR.

The European Union announced it will hold an investor call next Tuesday on the common bond issuance backing its coronavirus recovery fund, which is expected to start in mid-June and raise around 80 billion euros this year.

The European Commission said it will keep borrowing limits for European Union governments suspended for the third year in a row in 2022 to help finance economic recovery from the pandemic, but expects to restore them in 2023.

($1 = 0.8214 euros)

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