* German bond yields fall but still off lows at 0.40 pct
* Italy to kick off heavy supply with up to 6 bln euro sale
* U.S. inflation on Wednesday to inform rate hike outlook
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr
By Abhinav Ramnarayan
LONDON, Nov 13 (Reuters) - Euro zone bond yields slipped from recent highs on Monday but are set to be tested this week by a series of government bond sales, starting with Monday’s key Italian auction.
Government bond yields across the region rose towards the end of last week, triggered by a large seller of Bund futures on Thursday.
That curbed a rally that began after the European Central Bank’s October policy meeting, when it extended its bond-buying scheme until at least September 2018.
On Monday, yields edged lower across the board but remained near recent highs, with more than 30 billion euros of new bonds set to enter the market this week.
“Bonds could be somewhat weak during these auctions, especially today’s Italian auction, and I can see Bund yields moving higher,” said DZ Bank analyst Sebastian Fellechner.
However, he believes that in the long term southern European bonds will outperform their better-rated counterparts because of the benign environment.
“Overall, it’s a ‘Goldilocks’ environment for peripheral spreads,” he said, pointing to fading political concerns and the European Central Bank decision to keep up its stimulus.
Most euro zone bond yields were a basis point lower going into the auctions: the yield on Germany’s 10-year bond, the benchmark for the bloc, dropped a touch to 0.40 percent.
Italian 10-year borrowing costs slipped to 1.83 percent before Monday’s auction of 4.5 billion to 6 billion euros of bonds. The Netherlands, Germany, France and Spain follow later in the week.
Both German and Italian yields are still off last week’s lows - 8 bps and 14 bps higher respectively. Yields rose last week after a mystery seller sold a large chunk of German government bond futures on Thursday, sources said.
Uncertainty around tax reforms in the United States pushed U.S. Treasury yields higher on Friday, adding upward pressure on yields in Europe, as government bonds in the world’s major economies tend to follow each other.
This week’s U.S. inflation numbers may move markets again, as investors look for clues on future Federal Reserve rate increases.
“The pick-up in headline inflation since the summer has likely helped the Fed regain confidence (to hike rates), however the core measure has failed to improve,” Mizuho analysts said in a note.
“Any decline on this core measure could prove a temporary boost to U.S. Treasuries although we continue to expect higher yields into year-end.”
For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets
Reporting by Abhinav Ramnarayan, editing by Larry King