* Bond yields dip, market supported by ECB rate outlook
* Oil prices jump, German industrial orders fall
* Trade subdued due to London holiday
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr
By Dhara Ranasinghe
LONDON, May 7 (Reuters) - Euro zone government bond yields dipped on Monday as an unexpected fall in German industrial orders served as a reminder that a softening in economic data will encourage the European Central Bank to prolong an unwinding of stimulus.
German industrial orders unexpectedly dropped for the third month running in March due to weak foreign demand, data showed on Monday, suggesting factories in Europe’s largest economy are shifting into a lower gear.
A growing perception that a rise in euro zone interest rates will come later rather than sooner due to slowing growth momentum and still subdued inflation has underpinned euro zone bond markets although a jump in oil prices could limit further falls.
In early European trade, 10-year bond yields were down roughly 1 basis point on the day. Overall trade was subdued with markets in London closed for a holiday.
“Bonds are a bit firmer on the back of the softer German data,” said Commerzbank rates strategist Rainer Guntermann. “A lot has been repriced in terms of the ECB so the outlook for bonds is a bit more mixed.”
U.S. oil prices rose above $70 a barrel on Monday for the first time since November 2014 and Brent crude climbed to fresh highs, as a deepening economic crisis in Venezuela threatened the country’s already tumbling oil supply.
Oil prices often put upward pressure on bond yields given their implications for higher inflation.
Yet strength in bond markets suggests investors are not convinced that inflation will hit the ECB’s near-2 percent target anytime soon.
Data last week showed inflation unexpectedly slipped in April to 1.2 percent.
Germany’s 10-year bond yield dipped 1 basis point to 0.54 percent, close to a 2-1/2 week low hit after Friday’s weaker-than-expected U.S. jobs data.
Italy remained in focus after the leader of the anti-establishment 5-Star Movement, Luigi Di Maio, on Sunday made a last-ditch offer to the far-right League in a bid to break a political deadlock that has dragged on for more than two months.
For the first time since the inconclusive March 4 vote ended, Di Maio said he would pick a prime minister with League leader Matteo Salvini. Until now, Di Maio has insisted that he be the next premier.
The Italian/German 10-year bond yield gap was at 125 bps. On Friday it hit 126 bps, the widest in over two weeks.
“Italian BTP/Bund spreads will be further put to the test by last ditch efforts in Italy to hammer out a government coalition,” said Benjamin Schroeder. “As a last resort, a transitional government would be followed by new elections.” (Reporting by Dhara Ranasinghe Editing by Hugh Lawson)