* German yields set for fifth consecutive monthly fall
* Hints reinforce expectations of imminent ECB easing
* ECB warns hunt for yield could be creating bubbles
* Italy pays record low yields at auction
(Recasts with yields rising, fresh comments)
By Emelia Sithole-Matarise and John Geddie
LONDON, May 29 Euro zone bond yields mostly rose
on Thursday as investors booked profits after this week's solid
rally and looked to square positions for the end of the month.
The market pullback was however modest, with German bond
yields still headed for a fifth consecutive monthly fall on
expectations of imminent monetary policy easing from the
European Central Bank.
"People are probably looking for a degree of positioning
after a sharp rally yesterday and in anticipation of the ECB
next week," said Philip Shaw, chief economist at Investec.
A throng of ECB policymakers have hinted that the bank is
preparing the ground for a package of measures to be announced
at next week's meeting, as it looks to stave off deflation and
nurture the bloc's fledgling growth.
The supportive stance of global central banks has helped
financial markets in Europe to weather lacklustre economic
growth and the uncertainty of tensions over Ukraine.
German 10-year yields, the euro zone borrowing benchmark,
rose 2 basis points to 1.30 percent, not far from
their lowest level in 12 months around 1.28 percent.
German borrowing costs have dropped steadily in each month
of this year, a trend not seen since the 2008 financial crisis.
"Even around these levels, Bunds are very well-supported,"
Commerzbank analyst Michael Leister said.
A holiday in much of Europe kept trading thin on Thursday
and with investors squaring positions at the end of the month,
the rally probably will not accelerate this week, strategists
said. But market participants widely expect the ECB to cut its
deposit rate below zero and begin a refinancing operation aimed
at businesses when it meets on June 5, so they feel little
pressure to sell, either.
The head of Italy's main employers' association also called
on Thursday for the ECB to intervene to prevent a spiral of
recession and deflation in the currency bloc.
The ECB has warned that investors' pursuit of higher profits
could be creating new price bubbles in more vulnerable assets,
but this has done little to curb investor appetite across the
Italy paid record-low yields to sell five- and 10-year bonds
on Thursday, although some traders noted that overall demand
from investors was a little weak, which led to some
underperformance in peripheral debt.
The rally in Italian 10-year yields this week
has paused, with yields rising 3 bps to 2.97 percent after the
auction. The country's borrowing costs remain just above the
record low of 2.89 percent.
"It's not the kind of massive demand and upbeat auction
you've seen so far this year. It's a very low level for yields
at the moment and a lot of people are questioning whether these
low yields can be sustained over time," said Gianluca Ziglio,
head of fixed income research at Sunrise Brokers.
Spanish 10-year yields also traded just above
the record lows of 2.80 percent they reached on Wednesday, 4 bps
higher on the day at 2.87 percent.
A final reading of Spanish GDP confirmed output had risen
0.4 percent in the first quarter, its biggest increase since
Spain's worst economic downturn in modern times began. The
report failed to inspire much of a market reaction with trading
volumes thin. [ID: nL6N0OF1BX]
Portuguese equivalents were also 4 bps higher at 3.62
percent. Greek bonds were the best performers in the euro zone
periphery, with yields 5 bps lower at 6.27 percent.
(Editing by Louise Ireland/Ruth Pitchford)