September 12, 2018 / 12:44 PM / 7 months ago

UPDATE 2-Italian bond yields rise as tensions over budget resurface

* Ansa reports 5-Star may seek econ minister’s resignation

* 5-Star denies report, yields stay higher

* Report highlights tensions within government

* German 10-yr pulls back from 5-week highs (Updates price action, detail)

By Dhara Ranasinghe

LONDON, Sept 12 (Reuters) - Italy’s government bond yields rose on Wednesday after renewed signs of tension within the governing coalition in Rome over the 2019 budget.

State news agency Ansa said one of the parties in the coalition, the 5-Star Movement, would seek the resignation of Economy Minister Giovanni Tria if he did not approve 10 billion euros ($11.63 billion) in the budget for a universal income for the poor, which is its flagship policy promise.

The party denied the report on Wednesday but Italian yields held higher, indicating that investors remain concerned about the outlook for Italy’s finances.

“The stories highlight that there are struggles within the new government because if you want to keep the budget deficit in check, you need to compromise on your election policies,” said Martin van Vliet, senior rates strategist at ING.

“This shows that not all is well and underlines that markets remain nervous, and will trade on headlines over the next couple of weeks.”

Italian two and five-year bond yields rose about 6 basis points each , while 10-year yields were up 2.5 bps at 2.80 percent — above six-week lows hit a day earlier at around 2.70 percent.

The gap over benchmark German Bund yields widened to 240 bps from around 230 bps earlier in the session..

5-Star and coalition partner, the far-right League, took office in June and have held a series of meetings in recent weeks to hammer out a compromise over next year’s budget law.

The tone of those meetings have generally reassured a nervous bond market that the new government is not about to embark on a spending spree that will fail to keep the country’s high debt levels in check.

But Wednesday’s headlines highlight market sensitivity to the political noise.

Outside Italy, most 10-year euro zone bond yields were down 1-2 basis points,,.

A successful sale of Portuguese debt on Wednesday had helped boost sentiment towards peripheral debt markets but the mood towards Italy will be tested more fully by a bond sale in Rome on Thursday.

There was strong demand at a Spanish sale of 15-year inflation-linked bonds on Tuesday that attracted orders of more than 18 billion euros.

“The positive auction from Portugal has helped sentiment but the moves have been limited, with markets looking ahead to the ECB meeting,” said Richard McGuire, head of rates at Rabobank in London, referring to Thursday’s meeting of the European Central Bank.

Germany’s benchmark 10-year bond was down two basis points at 0.42 percent, pulling away from more than five-week highs hit on Tuesday.

($1 = 0.8598 euros)

Reporting by Dhara Ranasinghe; additional reporting by Virginia Furness; editing by John Stonestreet and Ken Ferris

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