September 8, 2017 / 7:44 AM / a year ago

UPDATE 1-Euro zone bond yields tumble as QE music plays on

(Writes through)

* ECB signal soft exit from monetary stimulus

* Dovish tone bolsters fixed income markets

* Bund yields hit new low, set for biggest 1-week fall in month

* French, Italian yields set for biggest weekly fall since July

* Euro zone periphery govt bond yields

By Dhara Ranasinghe

LONDON, Sept 8 (Reuters) - Euro zone government bond yields were set on Friday for their biggest weekly falls in at least a month, after the European Central Bank signalled a slow exit from its hefty bond-buying stimulus scheme.

ECB President Mario Draghi said on Thursday that a strong euro is weighing on inflation and will be a key factor next month when it decides how to proceed with the 2.3 trillion ($2.8 trillion) monetary stimulus in 2018.

His cautious comments raise the chances that the ECB will opt to phase out quantitative easing only very slowly next year, despite solid economic growth in the region and a scarcity of eligible debt for bond purchases that limit the bank’s room for manoeuvre.

“Markets are trading like there’s no tomorrow — the decision on tapering has been delayed and hopes are high that the exit will be softer,” said Christoph Rieger, rates strategist at Commerzbank.

“The risk is that markets are missing the main point, which is that the amount of bonds the ECB is still able to buy is limited.”

Germany’s benchmark 10-year bond yield fell to 0.286 percent in early Friday trade, its lowest level since late June . It is down 8 bps this week and set for its biggest weekly fall in a month.

Two-year German bond yields hit 4-1/2 month lows at around minus 0.80 percent. They were set for their biggest one-week drop since April.

The rally in the euro zone bond market following Thursday’s ECB meeting has been broad-based, with bond yields in France and Italy set for their biggest weekly falls since July.

The price and yield of a bond move in the opposite direction.

Portuguese 10-year bond yields meanwhile fell to their lowest level since August 2016 at 2.70 percent . They slid 13 bps on Thursday.

Analysts said peripheral bond markets were benefiting from a resurgence in carry trades, where investors borrow in low-yielding assets to invest in higher-yielding ones.

The ECB’s cautious stance had given investors comfort to renew buying of lower-rated European bonds they added.

Others said a scaling back of U.S. rate-hike expectations and concerns about the impact of hurricanes Irma and Harvey on the world’s largest economy also created a favourable backdrop for bond markets.

U.S. 10-year Treasury yields hit a 10-month low at 2.016 on Friday, while long-dated Japanese bond yields hovered near 10-month lows.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=

Reporting by Dhara Ranasinghe; Editing by Matthew Mpoke Bigg

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