UPDATE 1-Euro zone bond yields fall as focus on Italy's new 20-year bond, ECB

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds details, comments)

By Yoruk Bahceli

AMSTERDAM, Sept 8 (Reuters) – Euro zone bond yields fell on Tuesday with investors focused on bond sales and expecting supportive messaging from the European Central Bank later in the week.

Italy received over 84 billion euros of investor demand for a new 20-year bond via a syndicate of banks, which will raise 10 billion euros, above expectations from UniCredit, which earlier anticipated 6 to 8 billion euros.

“It’s a sign of strong demand and all the more interesting when it comes at a time we would call a doldrum for sovereign spreads,” said ING senior rates strategist Antoine Bouvet, citing uncertainty ahead of Thursday’s European Central Bank meeting and recent volatility.

After an underperformance in long-dated Italian bonds in anticipation of the sale on Monday, Italian yields fell on Tuesday. The 10-year yield was down 2 basis points to 1.10%

But the risk premium it pays for 10-year debt over safe-haven Germany, rising in recent weeks, is at 158 bps, just off one-month highs.

Bouvet said that the bond sale was a sign that the market likes exposure to names that pay a higher premium over German government bonds, as well as longer-dated bonds, also offering a yield pick-up.

Ahead of Thursday’s ECB meeting, German bond yields fell, with the 10-year yield down 3 basis points to -0.49% and market inflation expectations continued to deteriorate, with a key long-term gauge falling to a new one-month low at 1.17%.

No change to the ECB’s policy is expected, but investors will watch its inflation forecasts and messaging around its willingness to deploy its bond purchases.

But August’s negative euro zone inflation reading and the appreciation of the euro mean the risks are skewed towards easing from the ECB, analysts say, which would support bond assets.

There was also focus on the bank’s weekly bond purchase data released late on Monday, which showed its bond buying remained subdued last week as analysts were waiting to see whether it picks up again after the summer lull.

“The data confirm that the ECB can take it easy as long as market conditions are relaxed,” Commerzbank’s head of rates and credit research Christoph Rieger told clients.

Executive board member Isabel Schnabel told Reuters in late August that the lower purchase volumes reflected “seasonality patterns”, but also improved market conditions.

The euro zone economy declined by slightly less than initially estimated in the second quarter, but the drop was still the sharpest ever, data showed. (Reporting by Yoruk Bahceli, editing by Ed Osmond and Philippa Fletcher)

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