EURO GOVT-Lower-rated bonds outperform Bunds as ECB eyed
* ECB policymakers' dovish comments underpin bonds
* Euro zone yields dip but tipped to stay off year's lows
* Bunds end volatile second quarter lower
By Emelia Sithole-Matarise and Ana Nicolaci da Costa
LONDON, June 28 (Reuters) - Lower-rated euro zone bonds rose on Friday and more gains are seen next week on expectations that the European Central Bank will give further reassurance that its policy will stay ultra-easy for the foreseeable future.
Euro zone bonds across the credit spectrum have clawed back some of their losses this week after central bankers sought to calm concerns about reduced monetary stimulus in the wake of the U.S. Federal Reserve's plans to curtail its bond purchases.
Trade continued to be driven by expectations of when the Fed may begin winding back quantitative easing this year and against that backdrop, German Bunds posted a second straight month of losses.
Investors snapped up some peripheral euro zone paper, however, after the ECB said an exit from its exceptional monetary policy measures remained distant.
Euro zone bonds are now stabilising with policymakers seen maintaining their dovish tone at their meeting next Thursday but analysts said they did not expect yields to fall back to this year's lows.
"The ECB is in the camp where potentially they will be disappointed by the upcoming data and it could well be the ECB leaves the door open to do a little bit more on monetary policy," Commerzbank strategist David Schnautz said.
"Despite what some of his colleagues have been saying Draghi could be on the dovish side and be reassuring that the exit is nowhere near and this should help peripherals to continue finding firmer ground."
Ten-year Italian government bond yields fell 3 basis points to 4.55 percent while equivalent Spanish yields were 2 bps lower at 4.73 percent.
Analysts expected peripheral euro zone yields to have only limited room to ease further now that the idea of tapering was in the market and that volatility was expected to persist.
"The potential for a rally in the peripheral space is now more limited," said Patrick Jacq, European rate strategist at BNP Paribas.
"Liquidity and credit risk assessment has changed since the Fed spoke about tapering off... In the risk-reward environment, it will require higher yield than in the past because volatility is higher."
German Bunds fell 6 ticks to settle at 141.52, reversing earlier gains in volatile trading exacerbated by month- and quarter-end activity. Cash 10-year yields were slightly up at 1.74 percent, having retreated over the past few sessions from a 14-month peak of 1.85 percent hit on Monday.
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