March 13, 2018 / 11:50 AM / 3 months ago

UPDATE 1-Euro zone bond yields dip, focus shifts to U.S. inflation

* Netherlands, Italy auction bonds

* Heavy week of bond supply

* U.S. Feb inflation data also due out

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates with Italy auction results)

By Dhara Ranasinghe

LONDON, March 13 (Reuters) - Euro zone government bond yields edged lower on Tuesday, but deeper falls were kept in check as markets absorbed the first wave of this week’s hefty bond supply and focus turned to U.S. inflation data.

Bond markets in the single currency bloc have been well supported since last Thursday’s European Central Bank meeting, with policymakers stressing that interest rates will remain low for some time even as the bank takes tentative steps towards exiting its massive stimulus scheme.

Germany’s 10-year bond yield dipped to 0.62 percent , its lowest level in just over a week. Other euro zone bond yields were also a touch lower on the day.

“The market looks very well supported at the moment. The U.S. remains the main risk for the market in terms of a negative spill over,” said Commerzbank rates strategist Michael Leister.

“For 10-year (German) bond yields to fall below 0.60 percent, we need another strong trigger.”

Further falls in borrowing costs were also seen as limited for now as markets prepare to absorb up to 30 billion euros ($37 billion) worth of new supply this week - something that often puts upward pressure on bond yields.

In Italy, a debt auction that included a new seven-year bond sale met with decent demand. The bond sales come against a backdrop of uncertainty following an inconclusive March 4 election.

The leader of Italy’s far-right League, which emerged as the largest conservative party in the election, said on Tuesday that he did not see the country suddenly leaving the euro.

U.S. inflation data due later in the day was also in focus for clues on the pace of Federal Reserve interest rate rises this year.

Analysts polled by Reuters forecast the U.S. consumer price index rose 2.2 percent in February year-on-year, compared with a 2.1 percent rise a month earlier.

“In bond markets, focus today is solely on the U.S. CPI release, where we see the surprise risk for the core reading as being on the downside,” analysts at UniCredit said in note.

Elsewhere, Slovakia’s 10-year bond yield rose as much as five basis points and the cost of insuring exposure to its debt hit the highest in almost three months as the government inched towards collapse.

Slovakia’s three ruling coalition parties were holding talks on Tuesday, a government spokeswoman said, after a junior member called for an early election following mass protests against corruption and the murder of a journalist last month. ($1 = 0.8106 euros) (Reporting by Dhara Ranasinghe Editing by Andrew Heavens and Susan Fenton)

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