German yields head back to 6-month low on ECB outlook
* Germany to offer up to 4 billion euro of 5-year debt
* Lingering emerging market worries also support Bunds
* Spanish, Italian yields also fall
By Emelia Sithole-Matarise
LONDON, Feb 5 (Reuters) - German Bund yields slipped back towards six-month lows on Wednesday before a sale of bonds seen drawing solid demand on expectations the European Central Bank will signal further monetary policy easing this week.
Germany offers up to 4 billion euros of five-year bonds at an auction later in the day with lingering concerns over emerging markets and the ECB policy outlook supporting demand even though yields in the secondary market are near six-month lows.
Yields on five-year bonds were last 0.5 basis points lower at 0.55 percent with the 10-year Bund yield 1 basis point down at 1.54 percent, within a whisker of the six-month low of 1.534 percent hit on Tuesday.
"Uncertainties in emerging markets and expectations in the market that the ECB will deliver something tomorrow or send out a strong signal they (will) fight deflation after the pretty weak data on euro zone inflation last week have reinforced demand for safe-haven assets," said UniCredit strategist Luca Cazzulani.
"So despite the fact that yields are low there's demand out there for Bunds and we expect the auction to go well because of these two factors."
A fall in euro zone inflation to 0.7 percent last month, well below the ECB's target, and volatile money markets are piling pressure on the ECB to do more to pep up the block's weak recovery.
While a Reuters poll of 76 economists taken last week pointed to no change in ECB rates at its policy meeting on Thursday, a few - including Deutsche and RBS economists - expect some action.
"The ECB may not move on Thursday. Talk will, however, remain dovish with a door open for more easing in the coming months," said Societe Generale strategist Ciaran O'Hagan.
Analysts are also looking for clarity from ECB President Mario Draghi on reports it could suspend its weekly operations to soak up money it spent on crisis-era sovereign bonds in order to boost excess liquidity in money markets.
Yields on other euro zone bonds were also slightly lower, with Spanish and Italian yields down 2 bps at 3.55 percent and 3.76 percent respectively.
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