July 13, 2017 / 11:20 AM / 6 months ago

UPDATE 1-German Bund yield back below 0.5 percent as cautious Fed lifts sentiment

* Dovish Yellen comforts bond markets

* Bund yields back below 0.5 pct

* ECB’s Rimsevics sees bond purchases for another couple of years

* Italy sells top planned amount of bonds at auction

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates with latest price action, ECB comments)

By Dhara Ranasinghe

LONDON, July 13 (Reuters) - Germany’s benchmark 10-year government bond yield fell back below 0.5 percent to a one-week low on Thursday as cautious comments from central bankers in the United States and euro zone soothed a market on edge about tighter monetary policies.

In testimony delivered to Congress on Wednesday, U.S. Federal Reserve chief Janet Yellen said the Fed would not need to raise rates “all that much further” to reach current low estimates of the neutral fed funds rate.

ECB policy maker Ilmars Rimsevics said on Thursday that quantitative easing could continue for another couple of years given low inflation, pushing the euro to a one-week low.

That brought some comfort to bond markets unnerved in the past two weeks by signs that major central banks are stepping up efforts to unwind ultra-loose monetary policies - the Bank of Canada on Wednesday delivered its first rate hike in nearly seven years.

“The nuances in Yellen’s speech were slightly on the dovish side so people are taking that as an excuse to buy back into the bond market,” said Chris Scicluna, head of economic research at Daiwa Capital Markets.

Yellen testifies before the Senate Banking Committee later on Thursday and her comments are expected to be broadly in line with those made on Wednesday.

U.S. Treasuries have given up half of the yield rise and German Bund yields over a quarter seen after comments by European Central Bank chief Mario Draghi in Portugal on June 27. Draghi’s comments triggered a sharp selloff in bond markets, pushing prices down and yields up.

But on Thursday, Germany’s 10-year Bund yield fell 3 basis points to a one-week low of 0.477 percent. Just a week ago it shot decisively above 0.5 percent on rising expectations for tighter ECB monetary policy.

Other euro zone bond yields were down 2-5 basis points on the day, with Italian bond yields giving up earlier rises after a debt auction.

Italy sold 7.25 billion euros in debt - at the top of its planned range.

Data highlighting subdued inflation in the euro zone also suggests there is no rush for the ECB to scale back its monetary stimulus and should support bond markets, analysts said.

Annual inflation in Germany, harmonised to compare with other European countries, was confirmed at 1.5 percent in June. Year-on-year inflation in France eased to a seven-month low of 0.8 percent in June, unchanged from a preliminary estimate.

“The inflation numbers in Germany are somewhat cheering, but it is all about the overall picture for the euro zone,” said Naeem Aslam, chief market analyst at Think Markets UK.

“It indicates that inflationary pressure is subdued. Hence, there is no rush in changing the gear for monetary policy.”

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

Reporting by Dhara Ranasinghe; Editing by Alison Williams

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