* Prospect of reduced Fed stimulus lifts euro zone yields
* Bund futures hit lowest since October 2012
* Bunds may recover as periphery yields rise-analyst
By Marius Zaharia
LONDON, June 24 (Reuters) - German Bund futures hit eight-month lows and lower-rated debt yields rose on Monday as prospects of reduced monetary stimulus in the United States took a further toll on battered bond markets.
The Federal Reserve signalled last week that it would slow the pace of bond purchases later this year, triggering a global sell-off as investors interpreted the announcement as the first step towards the end of monetary easing.
The Bank for International Settlements echoed this theme on Sunday, saying central banks should not allow fears of disrupting markets delay the timely withdrawal of cheap money.
Adding to investor anxiety, official news reports in China over the weekend suggested Beijing will not change its tightening policy as it looks to crack down on shadow banking, blamed for a cash crunch on the mainland.
“The BIS suggested central banks should unwind monetary policy stimulus ... and it looks unlikely that China would be easing its policy any time soon,” said Nick Stamenkovic, bond strategist at RIA Capital Markets in Edinburgh.
“This created some nervousness ... But the main driver is the U.S. (central bank) ... which triggered a correlated sell-off in the U.S. and euro zone debt markets.”
Bund futures were last down 49 ticks on the day at 140.90, having earlier fallen as far as 140.58 - their lowest since October 2012.
Losses could extend towards the September 2012 low of 138.41 initially, Commerzbank technical strategists said in a weekly note. In the longer term, Bunds could fall towards the 132.82 - 132.99 area defined by the 50 percent retracement of the 2011-2013 rally and the lows hit at the end of 2011, they said.
However, Norbert Wuthe, rate strategist at Bayerische Landesbank in Munich, did not expect the sell-off in Bunds to last as the rise in peripheral yields, largely triggered by the Fed’s timetable for withdrawing stimulus, should renew safe-haven bids for German debt.
Economic and political weaknesses in the lower-rated states on the euro zone’s periphery should also add to Bunds’ appeal.
Italy said it plans to delay raising value added tax by at least three months as the proposed hike has become a source of tension within the ruling coalition. In Greece, one party pulled out of the government last week, leaving Prime Minister Antonis Samaras with a wafer-thin majority in parliament.
Europe’s unresolved structural issues could also become a cause of concern for investors.
Policymakers failed to take a step closer to a banking union at the weekend - a move seen as crucial to breaking the negative loop between struggling banks and indebted sovereigns - as Germany resisted attempts by France to water down rules designed to spare taxpayers in future banking crises.
“There’s a good chance of a Bunds recovery,” Wuthe said.
Italian 10-year yields were 12 bps higher on the day at 4.70 percent, while equivalent Spanish yields rose 8 bps to 4.96 percent. The two countries’ yields have risen by nearly a percentage point since early May.