* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr
LONDON, June 1 (Reuters) - Most euro zone government bond
markets were broadly steady on Tuesday, looking past a surge in
inflation in the currency bloc to the likelihood that hefty
monetary stimulus will remain in place for some time.
Italy's 10-year bond yield reached an over three-week low in
a sign markets were confident the European Central Bank will not
decide to slow the pace of bond buys when it meets on June 10.
Data showed inflation in the 19 countries sharing the euro
rose to 2% in May from 1.6% in April, driven by higher energy
costs to its fastest rate since late 2018 and above the ECB's
aim of "below but close to 2%".
In addition, IHS Markit's final Manufacturing Purchasing
Managers' Index (PMI) rose to 63.1 in May from April's 62.9,
above an initial 62.8 "flash" estimate and the highest reading
since the survey began in June 1997.
The ECB has stressed a near-term rise in inflation is driven
by one-off factors and long-term price pressures remain subdued,
meaning stimulus will still be needed.
That may help explain the muted reaction to the data in bond
markets, where yields have fallen in the past week amid dovish
comments from a slew of ECB officials.
"The proximity to the ECB meeting is shielding euro zone
rates from the fallout of higher CPI and higher PMIs this
morning," said ING senior rates strategist Antoine Bouvet.
"This is short-sighted I think and the rate rises should
resume after the pre-ECB pause."
Germany's benchmark 10-year Bund yield was steady at around
-0.18%, but holding below last month's two-year
highs. Most other 10-year euro zone bond yields were little
changed on the day.
Italy's 10-year bond yield extended recent falls to hit its
lowest level since May 7. It was last down around
1.3 bps at 0.903%.
"German Bund yields briefly rose then fell back immediately
after the flash CPI data and what this tells me is that markets
see no risk of tapering at next week's ECB meeting," said Saxo
Bank strategist Althea Spinozzi, explaining the move in Italian
"And the biggest beneficiary of that is Italian bonds."
Economic recovery prospects in the euro zone remain
uncertain and the ECB will counter any strong rises in interest
rates that are not justified by economic conditions, governing
council member Ignazio Visco said on Monday.
Elsewhere, the five-year breakeven forward, a key gauge of
the market's long-term euro zone inflation expectations, rose to
1.61%, its highest in nearly two weeks as oil prices topped $70
. It was last just below 1.6%.
In issuance news, the European Commission said it would
borrow about 80 billion euros of long-term bonds this year to
finance the 750 billion euro NextGenerationEU fund to support
the recovery. Borrowing will begin later this month.
(Reporting by Dhara Ranasinghe and Danilo Masoni; Editing by
Nick Macfie, Christina Fincher, Krishna Chandra Eluri and