* Hungary's bond yields continue to drop ahead of auction * Finance Minister says delayed EU funds can flow in soon * Hungarian wages, Polish retail data show strong growth * Polish shares give up some of Wednesday's strong gain By Sandor Peto BUDAPEST, Nov 22 (Reuters) - Hungarian government bond yields fell to multi-month lows ahead of the year's penultimate bond auction on Thursday, amid optimism over European Union fund inflows for the rest of 2018.
Two days after the National Bank of Hungary (NBH) kept the lowest central bank rate in the eastern wing of the European Union on hold at 0.9 percent, the country's bonds traded at yields about 5 basis points below Wednesday's fixing .
The 10-year yield, at 3.38 percent, was the lowest since August, while the 3-year yield, around 1.5 percent, traded at 5-month lows.
Hungarian bond yields often rise ahead of auctions, but this time they are under pressure as investors close short positions ahead of the end of the year, market participants said.
"Yields are coming back after a jump in early October as core market yields like Bunds have also come down," said Gergely Forian-Szabo, fund manager of Amundi in Budapest.
"Also there are positive developments in EU funds inflows despite earlier fears that their delay could open up a big gap in the budget," he added.
Finance Minister Mihaly Varga told Reuters late on Wednesday the government had pre-financed over 1.5 trillion forints ($5.32 billion) worth of spending, of which only some 600 billion had been reimbursed so far and more could arrive by the end of the year.
The Hungarian yield decline came in tandem with a rise in foreign investors' Hungarian government bond holdings to a 3-year high, Forian-Szabo said.
Worries the NBH could start to increase rates too late to tackle a rise in inflation have also eased, but may return if continuing strong growth gives more fuel to price rises than expected, market participants said.
"It will be exciting to watch if (annual) inflation figures in the next months indeed show a retreat (from 3.8 percent in October) towards 3 percent," one Budapest-based fixed income trader said.
A 10.4 percent annual rise in gross wages in Hungary, and a 9.7 percent increase in retail sales in Poland, indicated continuing robust growth in figures released on Thursday.
Despite the figures, Central European currencies and stocks gave up some of the ground they gained on Wednesday as fears of a global economic slowdown weighed on international markets.
Warsaw's bluechip equities index dropped by 0.3 percent after posting its biggest gain since early January on Wednesday, when it rose 2.7 percent.