By Dhara Ranasinghe
LONDON, Dec 19 (Reuters) - Southern Europe led a fall in euro zone government bond yields on Monday, with Italy again in focus as troubled bank Monte dei Paschi made a last-ditch attempt to raise 5 billion euros ($5.2 billion) by the end of the year and avoid a state bailout.
A survey showing German business morale rose in December to its highest level since February 2014 helped boost sentiment towards riskier assets, with yields on peripheral euro zone bonds falling 5-8 basis points in early trades.
As the day wore on, yields on higher-rated euro zone government bonds also fell.
The move was particularly marked among long-dated bonds, with Germany’s 30-year bond yield dipping below the 1 percent mark, falling 9 bps to hit a 10-day low of 0.98 percent.
Italy again grabbed the spotlight after Monte dei Paschi, the third largest Italian bank, said on Sunday it would offer new shares for sale between Monday and Thursday.
It also emerged on Monday that the lender is trying to resolve differences with a key investor over its 5 billion euro ($5.2 billion) rescue plan to allow the deal to go ahead and avoid a state bailout.
The European Central Bank has told the bank to raise capital this year and offload 28 billion euros in bad loans, but finding investors has proved difficult amid political turmoil and this month’s change of government.
Monte dei Paschi led European banking stocks lower as investors expressed caution that the bank, whose shares fell 11 percent on Monday, would be able to complete its raising of capital.
Efforts over the past week to clean up the banking sector and a smooth transition to a new prime minister, Paolo Gentiloni, have helped Italian bonds recover from losses made in the run-up up to a Dec. 4 referendum, in which voters rejected proposed constitutional reforms. Matteo Renzi quit as premier after that vote.
“The capital raising by Monte dei Paschi is important but it is something that has been discussed for some weeks now,” said Luca Cazzulani, a strategist at UniCredit.
The yield on Italy’s benchmark 10-year government bond was down 7 basis points at 1.83 percent, heading back towards a one-month low hit last week at around 1.77 percent.
Spain’s 10-year bond yield fell 7 bps to 1.38 percent , while Portugal’s 10-year yield was 6 bps lower at 3.78 percent.
“Peripheral bonds are performing well today. We’ve had a good Ifo survey and that has probably helped risk sentiment,” said Rabobank fixed income strategist Lyn Graham-Taylor.
The Munich-based Ifo economic institute said its business climate index, based on a monthly survey of some 7,000 German firms, rose to 111.0 after from 110.4 in November.
Federal Reserve Chair Janet Yellen speaks later in the day, with focus on her comments after the Fed’s decision last week to hike interest rates and signal a faster pace of hikes in 2017. (Reporting by Dhara Ranasinghe; editing by Gareth Jones and Toby Chopra)