* Saxony inflation falls drops, pushing yields lower
* Borrowing costs fall 2-3 bps across the bloc
* Italian auction due, includes 10- and 50-year bond sale
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr
By Abhinav Ramnarayan and Fanny Potkin
LONDON, Jan 30 (Reuters) - Borrowing costs across the euro zone came off multi-year highs on Tuesday as early indications left investors guessing on key German inflation numbers due out later in the day.
Regional data from the euro zone’s largest economy were mixed early and pointed to a possibly disappointing inflation number for Germany, due out at 1300 GMT.
Having hit multi-year highs on Monday on expectations that the European Central Bank will unwind stimulus, euro zone government bond yields were down 2-3 basis points across the board on Tuesday.
Consumer prices in Saxony rose much slower than the month before, but similar data in Brandenburg proved solid.
This gave rise to speculation that German inflation data for January, due out at 1300 GMT, would fall below expectations. As of now, a Reuters poll suggests consumer prices would rise 1.7 percent from the year before in Europe’s largest economy.
“Inflation data from Germany could be the game changer today, we already saw the print from Saxony was disappointing,” said DZ Bank analyst Sebastian Fellechner.
Consumer prices in the German state of Saxony were up by 1.4 percent year-on-year, the state’s statistics office said on Tuesday, compared to a 1.7 percent rise in December.
Prices in Brandenburg were up by 1.7 percent year-on-year.
The ECB’s target is for inflation of just below 2 percent in the euro zone.
“If German inflation readings are weaker, we would enter a consolidation mode as questions are raised on the sustained inflation dynamics in the euro zone,” said Fellechner.
Yields across the euro zone have risen sharply in recent weeks as a booming European economy has fuelled expectations that the ECB will end extraordinary stimulus sooner rather than later, potentially at the end of this year.
Currently the bank buys 30 billion euros of assets every month, a scheme that is set to run to September.
For example, the yield on Germany’s 10-year government bond, the benchmark for the bloc, rose from 0.306 percent in the first week of December to an over two-year high of 0.707 percent on Monday.
But it dropped once again on Tuesday, initially to a low of 0.675 percent after the Saxony numbers, before recovering a touch to 0.68 percent after the Brandenburg print.
Low-rated Southern European government bonds, seen as more dependent on ECB largesse, outperformed, with yields lower 3-4 bps.
This fall in yields came despite an upcoming auction of Italian debt.
Italy is scheduled to sell 5.5-6.5 billion euros in bonds including a 50-year bond and a new 10-year bond.
Italy has been in the spotlight in recent weeks with investors expecting some volatility in the run-up to a March 4 general election.
However, a strengthening euro zone economy has taken the edge off concerns over the popularity of anti-establishment party 5-Star Movement, and the Italy-Germany 10-year government bond yield spread is still close to tight levels at 138 bps.
The speculation over the ECB exit from stimulus also hit global bonds. Japan’s 10-year yield hit a 6 1/2-month high of 0.095.
The French economy rounded off its strongest year since 2011, official data showed on Tuesday. The euro zone’s second biggest economy grew 0.6 percent in the October through December period, up from the previous quarter when it grew 0.5 percent.
GDP data for the euro zone is also due out later on Tuesday. (Reporting by Fanny Potkin; Editing by Peter Graff)