* Best run for euro zone economy in a decade
* But policymakers warn about withdrawing stimulus
* Bloc's bond yields reverse early rise
* Germany auctions 10-year bonds
(Adds Draghi comments, updates prices for close)
By John Geddie
LONDON, May 24 The cautious tone of euro zone
central bankers in the wake of some of the best economic data in
years sent mixed signals to investors in the bloc's debt markets
Government bond yields across the region have been pegged
near record lows in recent years as the European Central Bank
has spent trillions of euros on an asset purchase scheme and cut
interest rates deep into negative territory.
But with the bloc's economy on its best run in a decade -
exemplified by a survey showing German consumers at their most
optimistic in nearly 16 years - and the ECB's purchase scheme
set to expire in December, investors are becoming increasingly
uncertain how long the central bank can hold its ground.
Key policymakers on Wednesday reiterated the dangers of
withdrawing its ultra-easy policy too early, with a report
warning that the risk of a sudden repricing of bond markets
Europe's benchmark German 10-year bond yield rose some 2
basis points in early trading to 0.42 percent
after the German GfK data, but after the ECB comments were back
down at around 0.40 percent and little changed on the day.
Most other euro zone yields were little changed to a touch
"The more we see upside surprises on growth, the more the
ECB could justify removing some of the stimulus slightly
earlier," said Mizuho's head of euro rates strategy Peter
Wednesday's consumer sentiment survey is just the latest in
a run of improving data with an economic indicator on Tuesday
showing that euro zone business growth remains at its strongest
About three quarters of economists in a Reuters poll said
the ECB will signal it is winding down its monthly asset
purchases by September, with six of those expecting the central
bank to move as early as next month.
But inflation remains the elephant in the room for the ECB.
While it has jumped into the ECB's near two percent target
range in recent months, chief economist Peter Praet said on
Wednesday that the central bank needs to see more evidence of a
sustained pick-up before it can reduce its stimulus.
ECB Vice President Vitor Constancio said the central bank
must err on the side of removing stimulus too late rather than
Markets are pricing in more than a 50 percent chance that
the ECB will raise interest rates in March 2018.
But ECB executive board member Benoit Coeure said on Tuesday
that negative interest rates have been an effective monetary
policy tool and there was no reason to change its guidance on
While ECB policymakers mull over their next steps to be
unveiled at a meeting in Tallinn, Estonia on June 8, minutes of
the U.S. Federal Reserve's last meeting will be released at 1800
Analysts say they are unlikely to erode high expectations
for a June rate increase in the U.S.
Elsewhere at the auctions, there was solid demand for 2.45
billion euros of 10-year bonds sold by Germany.
For Reuters Live Markets blog on European and UK stock
markets, see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets
(Editing by Raissa Kasolowsky and John Stonestreet)