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UPDATE 2-German yields fall to lowest since May, Portugal sells bonds with record low yield

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices, adds ECB's Mersch quotes)

AMSTERDAM, Oct 14 (Reuters) - Germany’s 10-year bond yield fell to its lowest since May and Portugal sold bonds at a record-low yield as threats to the bloc’s economy from a second wave of the coronavirus and expectations of stimulus from the European Central Bank continued to support government paper on Wednesday.

Anticipated support from the ECB has particularly benefited debt from lower-rated, Southern European countries, which offer a yield pick-up on the likes of Germany and would benefit the most from the stimulus.

Germany will recover more slowly from the coronavirus pandemic than originally predicted, Germany’s leading economic research institutes forecast on Wednesday while the euro zone industrial production reading for August slowed sharply as expected.

Portugal raised 1 billion euros from an auction, which included eight-year bonds pricing at a negative yield, the first time it has achieved a sub-zero yield on a maturity longer than six years.

Portugal and Spain’s 10-year yields are also heading closer to negative territory, currently both at around 0.14% .

“It is part of a general trend of dropping yields in the periphery and this is on the back of two things... the prospect of monetary and fiscal support from the ECB and EU respectively,” said Antoine Bouvet, senior rates strategist at ING.

“Italy, Greece, Portugal, they all stand to benefit a lot from ECB purchases and EU fiscal support when it materializes.”

But analysts are mindful of potential risks to Southern European debt as uncertainty remains around the ratification of the European Union’s 750 billion euro recovery fund. “The market seems poised to look through adverse EU headlines, which may pick up ahead of tomorrow’s summit,” Commerzbank’s head of rates and credit research Christoph Rieger told clients.

“The haggling and implementation risks look set to prevail for a while.”

Elsewhere, safe-haven German 10-year bond yields fell to their lowest since mid-May at -0.58%, down 2 basis points on the day.

Germany saw strong demand for its re-opening of a 30-year bond, which raised 897 million euros at a bid-cover ratio of 2.4-times.

Italian 10-year bond yields fell to a new record low at 0.634%

Focus was also on ECB speakers on Wednesday, with President Christine Lagarde saying it will review a key rule forcing it to buy corporate bonds in proportion of their outstanding amounts in light of the market’s “failure” to reflect risks related to climate change.

Statements from ECB outgoing board member Yves Mersch, who is associated with more hawkish views, didn’t trigger much action on bonds.

Mersch said he had yet to be convinced that the ECB, currently in the middle of rewriting its inflation target and how to achieve it, needed a new strategy at all. (Reporting by Yoruk Bahceli, additional reporting by Andrei Khalip in Lisbon; editing by Alexandra Hudson)

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