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UPDATE 2-Euro zone bond yields fall on expectations from ECB meeting

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds details)

AMSTERDAM/MILAN, Sept 8 (Reuters) - Expectations of supportive messages by the European Central Bank later this week and a decline in stocks boosted euro zone government bonds on Tuesday, while investors focused on a 20-year Italian bond sale.

Italy is set to raise 10 billion euros ($11.8 billion) from a new 20-year bond which drew strong demand, a lead manager said, with bids topping 84 billion euros.

UniCredit analysts were expecting 6 billion to 8 billion euros, which would have already taken Italy’s funding to 77% of its target amount for this year.

The BTP sale outcome is “a sign of strong demand and all the more interesting when it comes at a time we would call a doldrum for sovereign spreads,” said ING senior rates strategist Antoine Bouvet, citing uncertainty ahead of Thursday’s European Central Bank meeting and recent volatility.

After an underperformance in long-dated Italian bonds in anticipation of the sale on Monday, the Italian 10-year Btp yield was down 1.4 basis points at 1.66%.

But the risk premium it pays for 10-year debt over safe-haven Germany, hit its highest level since August 6 at 162.3 bps

Ahead of Thursday’s ECB meeting, the 10-year Bund yield was down 3.3 basis points at -0.49%, after hitting a new low since Aug. 24.

Market inflation expectations continued to deteriorate, with a key long-term gauge falling to a new one-month low at 1.17%.

No change to the ECB’s policy is expected, but investors will watch its inflation forecasts and messaging around its willingness to deploy its bond purchases.

However, August’s negative euro zone inflation reading and the appreciation of the euro mean the risks are skewed towards easing from the ECB, analysts say.

There was also focus on the bank’s weekly bond purchase data released late on Monday, which showed its bond buying remained subdued last week as analysts were waiting to see whether it picks up again after the summer lull.

“The data confirm that the ECB can take it easy as long as market conditions are relaxed,” Commerzbank’s head of rates and credit research Christoph Rieger told clients.

ECB executive board member Isabel Schnabel told Reuters in late August that the lower purchase volumes reflected “seasonality patterns”, but also improved market conditions.

The euro zone economy declined by slightly less than initially estimated in the second quarter, but the drop was still the sharpest ever, data showed. (Reporting by Yoruk Bahceli, editing by Ed Osmond, Philippa Fletcher and Susan Fenton)

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