August 29, 2018 / 11:12 AM / 25 days ago

UPDATE 3-Italian bond yields fall on report govt may ask ECB for support

* Italy’s bond yields down 4 bps, outperform euro zone peers

* La Stampa article on Italy and ECB in focus

* No comment from economy ministry on La Stampa

* Other euro zone bond yields edge up (Adds comments from Italian Deputy PM Di Maio, updates prices)

By Virginia Furness and Dhara Ranasinghe

LONDON, Aug 29 (Reuters) - Italian government bond yields fell on Wednesday, with analysts citing a La Stampa article saying that Italy may try to secure help from the European Central Bank.

The newspaper said the government was worried by what might happen in September when it unveils new public spending targets.

The budget, expected to contain welfare spending measures and tax cuts, will be approved by the cabinet in late October and sent to the European Commission by Oct. 31.

“If the ECB covers you, markets can’t speculate because they don’t make money,” La Stampa cited a government source as saying. “And in this way the rating agencies can’t downgrade your debt,” the source said.

Italy’s Deputy Prime Minister Luigi Di Maio said on Wednesday that the country has not asked the ECB to buy its bonds in case the government’s 2019 spending plans spark a loss of confidence among investors.

Italy’s bond market has faced selling pressure since a new anti-establishment coalition came to power in June.

Two-year yields were last down 10 basis points (bps) at 1.19 percent. Ten-year yields fell 5 bps to 3.13 percent, narrowing the gap over German Bund yields to 272 bps from 280 bps late on Tuesday.

“It seems like the move in Italian bonds is about this story,” Rabobank head of rates strategy Richard Maguire said.

“But in terms of the likelihood of the ECB intervening to help Italy with QE (quantitative easing), the political hurdle for the ECB would be extremely high.”

La Stampa said the ECB’s support could come in the form of a new quantitative easing programme.

Italy has been searching for allies to support its battered bond market in recent weeks.

Italy’s Economy Minister Giovanni Tria said on Tuesday that the Chinese government had no concerns about a recent widening of Italian yield spreads, following reports last week that U.S. President Donald Trump told Prime Minister Giuseppe Conte that the U.S. was ready to help Italy with its debt next year.

“At the end of the day the Italian government is looking for allies everywhere, they are cornered to some degree and eager to look for support,” DZ Bank rates strategist Christian Lenk said.

Analysts were sceptical about the impact of the article, which they said lacked details, pointing out that if Italy wants assistance from the ECB, Rome would have to apply to the ECB’s Outright Monetary Transactions (OMT) programme.

Under the OMT, the ECB could buy a country’s short-term bonds in the secondary market. But Italy must be in a macroeconomic adjustment programme with strict lender supervision to qualify for the scheme.

Also, a monetary policy tool targeting a single country would not be in line with the ECB’s mandate and so could be politically sensitive.

“The extension of ECB QE for Italian govvies is very unlikely,” DZ Bank’s Lenk said.

Some traders in Italy said a successful auction of Italian T-bills on Wednesday may have helped sentiment, while others pointed to a covering of short positions after five days of straight yield rises.

Outside Italy, bond yields were higher. Germany’s 10-year bond yield hit a three-week high at 0.41 percent after U.S. second-quarter GDP growth was revised up to 4.2 percent from 4.1 percent. (Reporting by Virginia Furness and Dhara Ranasinghe; Additional reporting by Stephen Jewkes in MILAN and Giuseppe Fonte in ROME; Editing by Andrew Bolton)

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