UPDATE 1-German yields fall to day's lows after disappointing ZEW data

Core bond yields in Europe tumbled to session lows on Tuesday after a survey showed the mood among German investors darkened more than expected in July, raising pressure on the central bank to ease monetary policy as early as next week. Yields on benchmark 10-year German debt slipped nearly two basis points to minus 0.308% in London trading, moving back towards a record low of minus 0.40% hit earlier this month.

The fall in German yields helped drag Italian bond yields towards a near three-year low hit in early July and yanked the euro to its lowest in five days. The ZEW institute said its monthly survey showed economic sentiment among investors fell to -24.5 from -21.1 in June. Economists had expected a less severe drop to -22.3.

"The ZEW data is not very encouraging and market expectations of a 10 basis point depo rate cut next week have increased as a result," said Kenneth Broux, a strategist at Societe Generale in London. Money markets raised expectations of a 10 basis point rate cut by the European Central Bank at a policy meeting next week to 36% from 30% last week.

Global fixed-income yields had soared last week, with German bond yields hitting a 3 1/2-week high after industrial output and inflation data in Europe and the United States suggested pessimism on economic growth might be overdone. But since then European yields have dropped as Italy led a rally in peripheral bonds, fuelling demand for the debt.

Adding to the uncertainty is a vote to name Germany's Ursula von der Leyen president of the European Commission. She could become the commission's first female president, but her candidacy is being opposed by European Union socialist and liberal lawmakers. "A rejection would definitely be a setback for the working climate in European institutions and markets will be firmly focused on the outcome for the vote," said Daniel Lenz, a rates strategist at DZ Bank in Frankfurt.

Greece is due to sell a seven-year bond on Tuesday with Mizuho strategists expecting yields below 1.8%, compared with 4.7% highs seen last year. Early indications are for a cut-off yield of around 2.1%. "Good demand for Greek debt should further fuel a rally in peripheral bonds," Lenz said.