* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Recasts lede, adds fund manager comment, background) LONDON, April 26 (Reuters) - Euro zone bond yields edged higher on Monday, amid a growing sense that the worst may be over for the bloc’s coronavirus-battered economy. Italy’s 10-year bond yield was up 1.5 basis points, after hitting its highest since October 2020 at 0.31%, up 5 bps, as prices fell and the gap over German peers widened out to 107 bps -- the most since March. Analysts noted upcoming supply as one reason for weakness in peripheral bonds, along with a feeling that a brighter outlook for the euro area could encourage the European Central Bank to slow the pace of its bond-buying stimulus in the months ahead. “Bonds are a bit on the back foot, and that might be in anticipation of a generally less supportive ECB environment after June,” said ING senior rates strategist Antoine Bouvet. “That’s the main factor, and also when we get an environment where rates are moving higher, there tends to be greater volatility in Italy versus say the German bond market.” The ECB’s Fabio Panetta eased worries by saying the ECB could and should keep credit cheap for a long time, even if borrowing costs rise due to a booming U.S. economy. Furthermore, net PEPP purchases in the week ending April 23 came in at 22.2 billion euros, the largest weekly net purchases number since end-June 2020, according to Refinitiv IFR. “BTPs are discounting the supply of these weeks (with today news of 30y in USD) and there is probably some fear for the 2021 deficit expected to be around 11%,” Mauro Valle, head of fixed income at Generali Investments, said. Valle continues forecasting a German Italian bond yield spread at around 100 basis points. U.S. Treasury yields were little changed on Monday before the Treasury Department sells $183 billion in debt, and ahead of this week’s Federal Reserve meeting. Italy has hired Citigroup Global Markets Europe AG, Deutsche Bank AG and Morgan Stanley Europe SE as lead managers for a new fixed-rate SEC-registered global bond in dollars, the Treasury said on Monday. Greek 10-year yields were flat at 0.93%, shrugging off S&P’s decision on Friday to lift Greece’s rating a notch to ‘BB.’ Germany’s Ifo institute said its business climate index, viewed as a leading economic indicator, edged up to 96.8 in April, rising less than expected. Germany’s 10-year Bund yield was up half a basis point at -0.25%, but below seven-week highs hit last week. Andreas Billmeier, European economist Western Asset, said the uptrend in European bond yields should be gradual and fits in with the overall picture of a recovering economy.