EURO GOVT-Italian yields fall as investors expect strong auction
* Italian 5- and 10-year debt auction seen going smoothly
Italian and other peripheral debt yields fall
* Bunds continue recovery on U.S. GDP revision, ECB comments
By Marius Zaharia
LONDON, June 27 (Reuters) - Italian government bond yields fell on Thursday before an auction of five- and 10-year debt at which investors expect solid demand.
Analysts said a smooth auction could further support this week's recovery in high-yielding euro zone bonds triggered by comments from European Central Bank policymakers that monetary tightening remains a distant prospect.
Italian and other peripheral yields rose last week after the Federal Reserve laid out plans to slow stimulus. Borrowing costs rose at sales earlier this week of Italian zero-coupon and short-term bill auctions earlier this week.
The Fed's policy outlook became less certain, however, after a sharp downward revision to first quarter growth data on Wednesday.
Ten-year Italian yields fell 10 basis points to 4.61 percent, defying the usual pattern in which bonds perform poorly before auctions as investors make room for the new supply.
"There's speculation that the Italian auction should go well and ... (this) would prove there's still risk-taking capacity out there," Commerzbank rate strategist Michael Leister said.
"It's a tricky environment but we've seen some stabilisation and the bonds look attractive."
Italy's benchmark bond yields are still about 80 bps above this year's lows hit in early May, but some 25 bps below this week's highs, having fallen due to what traders called "verbal intervention" by the ECB.
ECB President Mario Draghi has repeatedly said the central bank is far from ending its ultra-easy policy, a message also underlined by his French colleague Benoit Coeure on Monday.
Such comments also helped lift German Bund futures off Monday's eight-month low of 139.90. They were last 14 ticks higher on the day at 141.17, still some two points below where they stood before the Fed's announcement.
"We've had pretty supportive news this week and there's also month-end buying," one trader said.
Spanish 10-year yields also fell, down 9 bps at 4.72 percent, and Portuguese yields <PT10YT=TWEB fell by a similar amount to 6.63 percent.