* German bond yields at five-week high
* Italy budget, Brexit deal optimism knocks safe havens
* Italian bond yields turn positive after falling for six sessions
* Spain takes 18.5 billion euros of orders for 15-year inflation-linked bond
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices, recasts to reflect rising Bund yields, upcoming U.S. Treasury auction)
By Dhara Ranasinghe
LONDON, Sept 11 (Reuters) - Bond yields in benchmark euro zone issuer Germany rose to their highest level in five weeks on Tuesday, lifted by hopes of fiscal restraint in Italy, signs of a Brexit deal and higher yields on U.S. Treasury markets.
While demand for safe-haven assets has ebbed in recent days thanks to positive developments on the Italian and Brexit fronts, German bonds also felt pressure from 10-year U.S. Treasury yields which hit a one-month high ahead of a flood of new debt supply.
The Bund yield rose more than three basis points to a five-week high at 0.44 percent, while 10-year U.S. yields rose 3 bps and three-year yields jumped to 2.816 percent, the highest in more than a decade .
Later on Tuesday, the Treasury will auction over $35 billion of three-year notes, the highest amount since 2010. In total $144 billion will be sold this week.
Mizuho strategist Antoine Bouvet said the U.S. market was driving moves.
“For most of the morning the Bund was holding at 0.425 percent and was struggling to go higher, but the fundamental reason (for the rise) is there is supply in the U.S., and that typically that weighs on the market in the days before,” Bouvet said.
Meanwhile, Italy’s bond yields too turned positive for the first time in over a week, having fallen for six straight sessions previously. Italian bonds were up 1-3 basis points across the curve, after long-dated yields briefly hit their lowest level since late July earlier in the session.
Comments from top Italian politicians in recent weeks that European Union fiscal rules will be respected in the 2019 budget talks have boosted sentiment towards Italian debt as well as broader peripheral bond markets in the bloc.
Italian bonds have rallied around 50bp since the end of August, leading analysts to note that some investors may be profit taking ahead of the next Italian bond auction.
Italy’s Treasury said on Monday it would offer up to 7.75 billion euros ($9 billion) over three BTP bonds at an auction on Sept. 13.
Italy’s 10-year bond yield rose three bps to 2.77 percent, having fallen to its lowest in more than six weeks at 2.7 percent earlier in the session.
Shorter-dated Italian yields were up around 0.5 - 2 bps higher
Spain was also due to sell four billion euros of government bonds maturing November 2033 via syndication on Tuesday, taking orders of 18.5 billion euros for the deal.
Rabobank strategist Richard McGuire said the well-supported deal was evidence not only of the broader supportive bid for peripheral bonds, but also the fact that Spain has decoupled from Italy.
Regarding the broader demand for risk which has helped lift Bund yields, analysts pointed to comments on Monday from EU Brexit negotiator Michel Barnier that a divorce deal with Britain could be agreed in six to eight weeks if negotiators were realistic in their demands.
That news has lifted sterling as investors unwind the risk premium associated with Brexit talks, in turn undermining safe-haven debt.
British gilt yields rose to more than one-month highs earlier in the session.
“An easing of risks is weighing on German bonds,” said KBC rates strategist Mathias van der Jeugt. “If you look at yesterday’s driver, you see weakness in Bunds followed strength in Italian bonds and a second down leg in the German market followed the Barnier comments.”
Analysts said Thursday’s ECB meeting should temper bond market moves in general.
The ECB is expected to firm up its plans to halve monthly asset purchases to 15 billion euros ($17.4 billion) come October .
Reporting by Dhara Ranasinghe; Additional reporting by Virginia Furness, Editing by Keith Weir/Ed Osmond