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UPDATE 2-Fresh record lows for Italy, Greek debt yields

* Euro zone periphery govt bond yields (Updates prices)

LONDON, Oct 13 (Reuters) - Long-dated sovereign bond yields in Italy and Greece touched fresh record lows on Tuesday, with Italian borrowing costs at an auction also hitting new all-time lows in the latest sign of solid demand for peripheral euro zone debt.

Expectations of further European Central Bank stimulus to prop up an economy hit by the coronavirus have bolstered debt markets in recent weeks.

In addition, bond issuance is not as heavy as it was a few months ago - meaning upward pressure from anticipated bond supply has eased. Most euro zone issuers have now achieved 80% or more of their gross bond issuance target for 2020, Rabobank estimates.

“That rally in peripheral bonds has meant we are near our year-end target on spreads,” said Andrew Sheets, Morgan Stanley’s chief cross-asset strategist.

“I really think this is a story about supply - the periphery frontloaded its funding needs earlier this year so now as we move into the latter part of the year, not as much bonds are being issued so that creates a favourable supply/demand dynamic.”

Italy sold the top planned amount of 7.5 billion euros ($8.84 billion) worth of bonds on Tuesday. It placed a new three-year bond with a -0.14% gross yield, the lowest level ever.

Italy’s 10-, 30- and 50-year bond yields all touched fresh record lows. Italian 10-year bond yields fell to 0.656% and the real yield, which takes inflation into account, neared 0%.

Spanish and Portuguese 10-year nominal bond yields, which have also lurched closer to 0%, held near their lowest levels in months.

The Italian/German 10-year bond yield gap was at 121 basis points, after narrowing on Monday to its tightest since May 2018 at around 117 bps.

That spread is down almost 200 bps from a brief spike at the height of the coronavirus-induced market panic in March to just above 300 bps. That was just before the ECB stepped in with its Pandemic Emergency Purchase Programme to help calm markets.

The fact that even safe-haven German bonds have held their ground as equity markets rallied suggests demand for European fixed income remains firm, analysts said.

Germany’s 10-year Bund yield touched -0.56%, its lowest since August, French 10-year bond yields hit -0.30% -- their lowest level since March.

German investor sentiment fell by more than expected in October, the ZEW economic research institute said.

“ECB speakers are getting a lot more vocal on more monetary stimulus, we are also seeing some decent demand for curve flatteners in Europe. We are positioned in France and Italy that way,” said Sabrina Jacobs, fixed income investment specialist at Insight Investment.

“The ‘grab for yield’ continues.”

Reporting by Dhara Ranasinghe, additional reporting by Julien Ponthus editing by Larry King, Catherine Evans and Giles Elgood