UPDATE 3-Italian bond yields fall to 3-month low as Lagarde speaks

* Italian 10-yr yields drop to lowest since April

* ECB meets for first time since policy tweak

* Market expects extended period of stimulus (Updates prices; adds comment)

LONDON, July 22 (Reuters) – Euro zone bond yields fell on Thursday, with Italy’s sinking to their lowest in over three months, as the ECB kicked off its press conference with President Christine Lagarde expected to elaborate on a new target widely perceived as having dovish implications.

The European Central Bank, in its first official policy statement since it tweaked its inflation target, pledged to keep interest rates at record lows for even longer to help sluggish inflation in the euro zone rise back to its elusive 2% target.

German 10-year bond yields, the benchmark for the bloc, were down nearly 3 basis points to -0.423% at the start of ECB chief Christine Lagarde’s press conference, nearing the lowest since February.

Italy’s 10-year bond yield dropped more than 4 bps to 0.6488%, the lowest since early April, and its five-year yield turned negative for the first time also since April. . Other southern European benchmark bond yields were down 5-6 basis points.

“This is very dovish… The ECB just committed that it will ‘never’’ hike its rate, at least in the foreseeable horizon,” said Louis Harreau, ECB strategist at Credit Agricole CIB.

“I don’t see any universe in which the ECB can forecast two consecutive years with 2%-plus inflation… before say 2030”

The ECB’s recent statement that it believes any further cut in interest rates would not be beneficial given their already low levels has led investors to conclude that the focus will shift even further to bond purchases.

“The forward guidance is a bit more dovish and allows for more easy policy. The recalibration is about the duration of support rather than the size of the support,” said Piet Haines Christiansen, chief strategist at Danske Bank.

“This is more aligned to the new strategy outcome rather than a new policy signal,” he said, adding that the wording on bond buying is unchanged.

Italy, as one of the lowest-rated countries in the single currency bloc and one of the biggest sovereign borrowers in the world, is seen as the biggest beneficiary of such a shift.

The closely-watched spread between Italian yields and German Bunds – the euro zone’s benchmark – narrowed to 105 basis points on Thursday; still a distance from July’s low of 98.72 bps.

The euro initially fell after the ECB decision before recovering to trade at $1.1792, unchanged on the day and still close to 3-1/2 month lows versus the dollar.

Traders said the central bank announcement was in line with anticipations and therefore had little impact on a currency expected to remain under pressure given the ECB’s dovish tone.”

Euro zone banks initially ticked higher but gradually erased they gains and at 1245 GMT, were trading lower than they were prior to the announcement

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