EURO GOVT-Peripheral bonds rise, officials dampen stimulus exit bets
* ECB comments this week support euro zone bonds
* Markets remain sensitive to U.S. rates outlook, data
* Italian debt auction received well by the market
LONDON, June 27 (Reuters) - Lower-rated euro zone debt rebounded on Thursday, with investors buying back into cheapened markets, after central bank officials this week sought to calm fears of an imminent withdrawal of monetary stimulus.
A debt auction propelled Italian bonds into the day's top three performers, lagging only less liquid Portugal and Greece.
Euro zone yields rose across the board last week after the Fed announced plans to slow its bond purchases with newly-printed money, but mixed U.S. data and dovish comments from Fed officials have since made the outlook less certain.
With European Central Bank policymakers repeatedly saying this week that withdrawing extraordinary easing measures was a "distant" prospect, analysts expect peripheral debt to recover further before the bank's rate-setters meet next week.
But "some of the air that has been in assets will have to be taken out," said one trader said, suggesting that not all Fed-led losses would be clawed back. "We trade figure to figure ... the only certain thing is volatility stays with us, which should make investors slightly more cautious."
Ten-year Italian yields were 13 basis points lower on the day at 4.58 percent, while equivalent Spanish yields fell 6 bps to 4.75 percent.
"The Italian auction also went well and we've had people looking to switch into Italy out of Spain," said another trader.
The spread between the two shrank to 10 bps this week, the bottom of a recent 30 basis-point range, as positioning for the auction led to Italian underperformance. Italy's 10-year spread over Germany narrowed to 285 bps, having hit its widest since mid-April earlier this week at 307 bps.
Italy sold 5 billion euros worth of five- and 10-year bonds, drawing demand in line with this year's average, but paying the highest borrowing costs since March.
"They sold the maximum intended amount, which is a good thing, but ... bid/covers stayed largely unchanged. That's perfectly understandable in the volatile market environment," said KBC rate strategist Mathias van der Jeugt.
"Overall it's job done and ... markets seem to be happy."
While markets focused on central bank policy outlooks, European Union leaders agreed to force investors and wealthy savers to share the costs of future bank failures.
Analysts were wary of cheering any EU-level agreement made before German elections in September.
"The headlines are very upbeat, but we see it as rather worrying," Societe Generale rate strategist Ciaran O'Hagan said.
"If you read the statement it is all in conditional tense ... It's rather a series of aspirations than a detailed agreement and it could all change."
Bund futures rose 43 ticks to 141.46, with recent ECB comments supporting a recovery from Monday's eight-month low of 139.90. One trader said month-end buying had also helped.