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Imminent supply can't weaken demand for euro zone bonds

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

LONDON, Oct 13 (Reuters) - Government bond yields in the euro area held near recent lows on Tuesday, with even hefty supply failing to put much of a dent in a market bolstered by expectations for further European Central Bank easing in the months ahead.

Long-dated Italian bonds yields were near Monday’s record lows and are down almost 20 basis points this month, also pushed down by demand for risk assets in recent weeks.

The euro zone economy is losing momentum and the European Central Bank will react accordingly, ECB Vice President Luis de Guindos said late on Monday, citing December’s macro-economic projections as a key guide for future policy moves.

The fact that even safe-haven German bonds have held their ground as equity markets rallied suggests demand for European fixed income remains firm, analysts said.

In early trade, Germany’s 10-year Bund yield touched -0.538% , its lowest in just over a week.

In Italy, 10-year bond yields traded at 0.68%, again near Monday’s record lows. Spanish and Portuguese 10-year yields, which have also lurched closer to 0%, held near their lowest levels in months.

The gap between 10-year bonds yields in Italy and top-rated Germany narrowed on Monday to around 117 basis points -- its tightest since May 2018.

That spread is down almost 200 bps from a brief spike at the height of the coronavirus-induced market panic in March to just above 300 bps. That was just before the ECB stepped in with its Pandemic Emergency Purchase Programme to help calm markets.

“I guess the ECB is very happy with the way things are developing in the bond market,” said Frederik Ducrozet, a strategist at Pictet Wealth Management.

Italy is scheduled to sell more than 3 billion euros of three, seven and 30-year bonds later this session.

The new three-year BTP is likely to have a negative yield and one of the lowest on record at a three-year auction, UniCredit analysts said in a note. (Reporting by Dhara Ranasinghe, editing by Larry King)

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