* Italy/Germany 10-year yield spread at tightest in two weeks * Italy sees low demand for 10-year auction * U.S. underlying inflation has little market impact * Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Recasts, adds details, updates prices) LONDON, May 28 (Reuters) - The gap between Italian and German bond yields was at its narrowest in a fortnight on Friday as dovish messaging from the European Central Bank continued to support Italian debt. After a prolonged selloff of Italian debt recently, Rome’s borrowing costs were set to drop for the second week running. Italian bonds have been a key winner of dovish ECB commentary since last week, led by President Christine Lagarde, who said it was too early for the central bank to discuss slowing its pandemic emergency bond purchases (PEPP) Momentum continued on Friday, when Italian 10-year yields fell another 2 basis points on the day to 0.92% by 1452 GMT, bringing the yield down nearly 12 basis points this week. The closely watched Italy-Germany 10-year bond yield spread fell to the lowest in over two weeks at around 110 bps. Italy’s 10-year yields had risen to 1.16% before those remarks as investors speculated that the bank may slow the bond purchases at its June 10 meeting, but soon afterwards fell back below 1.00%. With euro zone countries having racked up debt to combat the economic impact of the COVID-19 pandemic, ECB support is seen as crucial, especially for countries such as Italy that came into the crisis with a heavy debt load. “The trend of (spread) tightening should continue as ECB dovishness feeds more into market pricing ahead of their next meeting,” analysts at Mizuho said in a note. But, despite the strong performance of Italian debt, Rome’s auction of 10-year bonds received bids only 1.32-times the 3.5 billion euros raised, the lowest this year, according to Saxo Bank strategist Althea Spinozzi. Italy also auctioned five-year conventional and floating-rate bonds. “It is really surprising to see demand falling also for the highest yielding sovereign in Europe,” Spinozzi said. That is however not as concerning as a German auction earlier in the week, which technically failed when it received fewer bids than Germany’s target amount, according to Spinozzi. Some analysts had taken the German auction as a sign that the recent fall in German bond yields may have been overdone. German 10-year yields, the benchmark for the bloc, were down nearly 2 bps to -0.19%, far below their recent two-year high at -0.074%. Down 6 bps this week, they were set for their biggest weekly fall since December, when the ECB expanded PEPP. Bond markets shrugged off an underlying inflation reading in the U.S. climbing to 3.1% in April, far above the U.S. Federal Reserve’s target. Reporting by Abhinav Ramnarayan and Yoruk Bahceli; Editing by Gareth Jones, Kevin Liffey and Alison Williams Our Standards: The Thomson Reuters Trust Principles.