EURO GOVT-Italy, Spain yields fall after euro zone data, ECB eyed
* Lower-rated euro zone debt extend last week's rebound
* Investors unlikely to place big bets before ECB meeting
* Bunds rebound after U.S. manufacturing data, payrolls eyed
(Updates to close)
LONDON, July 1 (Reuters) - Italian and Spanish government bond yields fell on Monday, outperforming German debt, after euro zone manufacturing data showed signs of stabilisation in the region's weaker economies.
Surveys showed Italian factory activity shrank at its slowest in two years in June while Spanish manufacturing held steady after shrinking for more than two years.
Spanish yields extended last week's falls as investors bought back into cheapened debt after last month's sell-off on U.S. Federal Reserve plans to reduce its stimulus.
Spanish 10-year yields were down 12 basis points at 4.60 percent while equivalent Italian yields were 8.5 bps lower at 4.45 percent.
The European Central Bank meets on Thursday and is widely expected to keep rates at a record low 0.5 percent. The focus will be on whether President Mario Draghi will be as dovish as last week, when policymakers sought to calm investors rattled by the Fed.
"It's quite unlikely they will take aggressive action with PMIs improving every month but nevertheless this doesn't exclude further assurances to the market," Commerzbank strategist Michael Leister said.
"Fundamentally at least we seem to have found a bottom here and there's still valuations to consider as the periphery has been quite cheap following the sell-off."
Others said it was unlikely Draghi would veer too far away from recent comments that an exit from exceptional monetary policy in the euro zone remains distant.
"Draghi on Thursday at the press conference will try to be consistent with those comments to maintain credibility," Philip Tyson, strategist at ICAP said.
At the other end of the credit spectrum, German Bund futures were 7 ticks higher at 141.59, having erased losses as data showed U.S. manufacturing activity grew a touch above expectations in June.
Bond markets have been particularly sensitive to U.S. releases as they try to gauge when the Federal Reserve may begin to unwind ultra-loose monetary policy.
With this in mind, investors were wary of putting on big positions before key U.S. jobs data later in the week.
"It hasn't really altered the debate about tapering in the U.S. hugely," Tyson said in reference to this session's U.S. data. "We still (have) got the non-manufacturing index on Wednesday and the key payrolls on Friday so I think we are a little bit on a holding mode," Tyson added.
(Editing by Nigel Stephenson/Ruth Pitchford)