ECB easing bets keep euro zone bond yields subdued
* Italian, Spanish yields resume falls
* ECB outlook also supporting core euro zone debt
* German 30-year bond sale seen going smoothly
By Emelia Sithole-Matarise
LONDON, May 28 (Reuters) - Euro zone government bond yields dipped further on Wednesday as expectations that the European Central Bank will deliver monetary stimulus next week underpinned demand.
Euro zone bonds across the credit spectrum have firmed this week as fears receded that big wins by anti-euro parties in EU parliamentary elections might derail fiscal reforms in weaker countries and ECB policymakers signalled further policy easing.
As well as a rate cut, the ECB is preparing a package of other easing measures, Reuters reported earlier this month. They include cutting the deposit rate into negative territory - effectively charging banks to hold cash at the ECB overnight - and targeted measures to help boost lending to smaller firms.
"Price action is mainly being driven by the prospect of the ECB (easing) next week," said BNP Paribas strategist Patrick Jacq. "The ECB may not only cut interest rates but could also take additional decisions on liquidity measures, and that's supporting the market."
Italian 10-year bond yields were 3 basis points down at 2.97 percent, extending their fall after Prime Minister Matteo Renzi's party scored a surprisingly big win in EU parliamentary elections over the anti-establishment 5-Star Movement.
Equivalent Spanish yields were down by a similar amount at 2.87 percent with Irish yields 1 bp lower at 2.69 percent.
The firm tone augured well for an Italian auction on Thursday of 6.0 billion to 7.5 billion euros of five- and 10-year bonds, after a smooth sale on Tuesday of 3 billion euros of zero-coupon debt and 1 billion euros of inflation-linked bonds.
"There might just be a little bit of concession going into the auction tomorrow but it should go OK," a trader said. "Bigger picture, we still remain constructive on the periphery given the ECB outlook and think there will be further compression in spreads."
A sale of up to 2 billion euros of German 30-year bonds on Wednesday is also expected to be comfortably absorbed given the small size of the offer and the ECB's easing signals.
The 30-year Bund yielded 2.24 percent in the secondary market, down 2 bps on the day with 10-year Bund yields , the benchmark for euro zone borrowing, down a similar amount at 1.32 percent. Other top-rated euro zone bond yields were 2-3 bps lower. (Editing by Catherine Evans)
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