×

UPDATE 1-German 2-year bond yields at lowest since mid-June after auction

* Germany sells 3.2 billion euros of 2-year Schatz bonds

* Two-year yields dip to lowest in almost 7 weeks

* Other euro zone bond yields also lower on day

* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr (Updates with auction results, price move)

LONDON, Aug 1 (Reuters) - Germany's short-dated bond yields fell to their lowest level in almost seven weeks on Tuesday, following firm demand at a sale of two-year Schatz paper.

The euro zone's benchmark bond issuer sold 3.219 billion euros of the bonds. The bid-to-cover ratio, which measures the degree to which demand exceeds the quantity of bonds allocated, was 2.0.

Analysts said a number of factors had supported demand for short-dated bonds in Germany, also the bloc's biggest economy.

Central bank buying for European Central Bank stimulus remains skewed towards shorter-dated paper in Germany, putting downward pressure on yields, which move in the opposite direction to prices.

In addition, a rally in the euro has lifted demand for euro-denominated assets, with peripheral bonds and shorter-dated German debt benefiting the most.

The common currency is trading near 2-1/2-year highs against the dollar and is up around 13 percent so far this year.

Finally a view that the ECB is unlikely to raise interest rates anytime soon even as it looks to scale back its stimulus scheme has anchored short-dated bond yields.

While long-dated bond yields in Germany have risen and held at higher levels since a speech by ECB chief Mario Draghi in Portugal in late June, short-dated peers have given up initial rises to head back down.

Trade in money market futures suggests investors to do not expect the ECB to lift interest rates until the final quarter of 2018.

"The Schatz auction went rather well despite the still low yield levels on these bonds," said DZ Bank strategist Christian Lenk. "We have retraced from the highs seen at the end of June and this partly reflects a view that the ECB won't lift rates soon."

Germany's two-year yield dipped about 1.5 basis points to minus 0.687 percent, its lowest in almost seven weeks.

Most 10-year bond yields across the euro zone were 2-3 basis points lower on the day.

Data showed euro zone growth remained robust in the second quarter after a strong reading in the first three months of the year.

Eurostat said gross domestic product in the 19-country bloc increased 0.6 percent on the quarter in the second quarter and 2.1 percent on the year, in line with forecasts of economists polled by Reuters.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.bi z / c m s / ? p a g e I d = l i v e m a r k e t s

(Reporting by Dhara Ranasinghe; Editing by Gareth Jones and John Stonestreet)