October 12, 2018 / 7:46 AM / a year ago

Calmer stocks dent euro zone debt, Bunds set for best week since August

* Stocks bounce pushes most euro zone bond yields up

* Recovery in risk appetite benefits Italian market

* IMF says Italy needs to respect EU budget rules

* Moody’s to review Portugal ratings

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

By Dhara Ranasinghe

LONDON, Oct 12 (Reuters) - Euro zone bond yields were mostly higher on Friday as a bounce in world stocks dented demand for bond safe havens, although the equity rout still left German bond yields on track for their first weekly fall in six weeks.

The recovery in risk appetite globally leant some support to a battered Italian debt market, where yields were 3 to 5 basis points lower in early trade.

European shares opened 1 percent higher, tracking a rise in Asian shares as equity markets recovered from this week’s rout.

This biggest stock market shakeout since February has been blamed on a series of factors, including worries about the impact of a Sino-U.S. trade war, a spike in U.S. bond yields and caution ahead of earnings season.

“We’re still left with the sense that there has been a significant shift that markets now have to take stock of,” said Chris Scicluna, head of economic research at Daiwa Capital Markets in London.

Except for Italy, most bond yields in the euro zone were 1 to 3 bps higher on the day.

Germany’s 10-year Bund yield was up 2.5 basis points at 0.54 percent on Friday, but down from 4 1/2-month highs reached earlier this week at 0.58 percent.

It has fallen just over 2 bps this week, the first decline in six weeks and the biggest drop in two months.

For some analysts, the relatively small drop in German bond yields was a sign of investor reluctance to buy fixed income.

“Ten-year German yields failed to close through 0.50 percent in spite of the Italian budget turmoil at the start of the week, and despite the global stocks meltdown,” Mizuho analysts said in a note. “This shows the reluctance of investors to chase yields lower, in our view.”

Italy’s bonds stabilised, with analysts saying a lot of negative news has now been priced into the market.

Italian 10-year bond yields rose to 4 1/2-year highs earlier this week on tension between Rome and the European Union over Italy’s expansionary budget plans.

The Italian parliament voted on Thursday to push back the goal of a balanced budget from 2020 to beyond 2021, reflecting the government’s new fiscal targets issued this month.

On Friday, the International Monetary Fund said Italy needs to respect EU budget rules and build a cash buffer to cushion the next economic downturn.

Portugal was also in focus amid expectations that ratings agency Moody’s would lift the country’s rating by one notch to investment grade later on Friday.

Reporting by Dhara Ranasinghe, editing by Larry King

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