* Key risk event week for markets; ECB meets Thursday
* ECB expected to take more benign view of economy
* German Bund yields tad higher, still close to 1-month lows
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices)
By Dhara Ranasinghe
LONDON, June 5 (Reuters) - German benchmark government bond yields nudged up on Monday but did not venture far from one-month lows, with bond investors confident that the European Central Bank will this week only take baby steps towards unwinding its extraordinary stimulus.
The ECB, which meets on Thursday, is set to take a more benign view of the economy and will even discuss dropping some of its pledges to ramp up stimulus if needed, sources with direct knowledge of the discussions told Reuters last week.
An improving economy and some fading of euro zone political risks following French presidential elections in April and May have boosted speculation about a scaling back or “tapering” of the ECB’s massive asset-purchase scheme in coming months.
But with the ECB expected to strike a cautious tone because of doubts around inflation, bond investors seem largely unruffled.
Data last week showed inflation in the euro area slowed to 1.4 percent year-on-year in May, from 1.9 percent in April. The ECB targets inflation of just below 2 percent.
“My reading of what the market is pricing in at the moment is that there will be a change in language but one that has been well telegraphed by the ECB,” said Antoine Bouvet, a rates strategist at Mizuho.
“ECB policymakers have gone out of their way to stress that this will not be a prelude to an early unwinding of policy, so the ECB is still in easing mode until the end of the year and that is supportive for bond spreads and duration.”
Germany’s benchmark 10-year bond or Bund yield closed the European session up 2 basis points at 0.29 percent but within sight of one-month lows hit last week.
Short-dated German bond yields remain deep in negative territory, and Tradeweb data released on Monday showed the share of euro zone government debt with yields below zero has risen to its highest level so far this year.
Money market pricing meanwhile suggests investors are not anticipating a rate hike within the next year.
“The data, especially the inflation numbers, have not been strong enough to suggest a hawkish tone from the ECB this week,” said Orlando Green, European fixed income strategist at Credit Agricole. “They are likely to leave things as balanced as possible.”
Weaker-than-expected U.S. employment data on Friday has also cemented a view that while the U.S. Federal Reserve is likely to raise rates when it meets next week it is likely to be cautious about further rate increases.
Long-dated Treasury yields fell to nearly seven-month lows after the jobs data but also edged higher on Monday .
Analysts said safe-haven bond markets could draw support from uncertainty surrounding Thursday’s general election in Britain, where seven people were killed in a militant attack in London at the weekend.
Polls show the election is much tighter than previously predicted. A close election could throw Britain into political deadlock just days before formal Brexit talks with the European Union are due to begin on June 19.
Across the euro zone, most 10-year bond yields outside Germany were 1-2 basis points higher on the day with trading subdued by a public holiday in a large swathe of the bloc.
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
Editing by Toby Chopra