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RPT-UPDATE 1-Euro zone bond yields fall, Portugal auction lifts sentiment

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* Euro zone bond yields broadly lower

* Portuguese auction boosts sentiment

* ECB to trim growth forecasts - report

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

By Dhara Ranasinghe and Virginia Furness

LONDON, Sept 12 (Reuters) - Government bond yields across the euro zone inched down on Wednesday, with a successful sale of Portuguese debt boosting sentiment towards peripheral markets.

Italian bond yields, which had risen sharply in early trade, reversed those falls after Portugal sold 1 billion euros of five- and 10-year bonds, exactly the upper limit of the offer.

That sale follows strong demand at a Spanish sale of 15-year inflation-linked bonds on Tuesday that attracted orders of more than 18 billion euros.

Ten-year bond yields across the euro zone were down as much as 2-3 basis points , with Italian 10-year bond yields trading at 2.75 percent — heading back towards six-week lows hit on Tuesday.

Richard McGuire, head of rates at Rabobank in London, attributed early weakness in Italian bonds to a report citing comments from Deputy Prime Minister Luigi Di Maio that the government could face a serious problem if it fails to introduce measures to provide a citizens’ income in the next budget law.

Such measures could increase spending and exacerbate Italy’s already high debt burden.

“The positive auction from Portugal has helped sentiment but the moves have been limited, with markets looking ahead to the ECB meeting,” he added.

The European Central Bank meets on Thursday.

Analysts said a report from Bloomberg news that the ECB is likely to revise down its economic growth forecasts may have boosted market expectations for a dovish outcome, helping to push bond yields down.

Germany’s benchmark 10-year bond yield was last down 2 bps at 0.41 percent, pulling away from more than five-week highs hit on Tuesday amid a selloff in U.S. Treasuries and as hopes for a Brexit deal and fiscal restraint in Italy boosted risk appetite.

“Earlier there was a lot of fear the Italian budget was going to be gravity-defying but that risk has come down at the margins and that risk premium has been taken out,” said Salman Ahmed, chief investment strategist at Lombard Odier.

An Italian bond sale on Thursday may prove a test of sentiment.

“The wording of the Italian government is more market orientated and there are positive signs that the first budget draft will have a deficit of below three percent,” said DZ Bank rates strategist Daniel Lenz.

“But we are still concerned that some of the details of the budget proposal won’t suit the market very well and (the question is) how will they finance these extra expenditures?”

Elsewhere, Germany sold 768 million euros of 30-year bonds.

Reporting by Dhara Ranasinghe and Virginia Furness; Additional reporting by Sujata Rao; Editing by Gareth Jones

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