(Corrects day in paragraph 10 to Thursday, not Wednesday, and adds dropped word ‘yields’ in para 3)
* Italian bonds fall ahead of budget proposal
* Salvini says budget meeting went well
* Di Maio denies he had threatened to pull his party out of govt
* German bonds fall to 0.47 pct
By Virginia Furness
LONDON, Sept 21 (Reuters) - Italian bond yields fell on Friday as investors awaited clarity on the 2019 budget and after the 5-Star Movement denied a report that Deputy Prime Minister Luigi Di Maio had threatened to pull his party out of the government.
A report by the national statistics institute ISTAT that the budget deficit as a proportion of national output was slightly higher last year than previously estimated but that debt was lower also helped to push down yields.
Elsewhere German government bond yields edged lower after EU leaders dismissed British Prime Minister Theresa May’s Brexit proposal, while purchasing managers’ index data showed euro zone business growth eased again in September.
Italy’s League party, 5-Star’s coalition partner, is seeking a flat tax rate for small companies.
Di Maio confirmed flat tax, new rules over pensions and 5-Star’s policy of a universal income for poorer Italians would be part of the 2019 budget, adding that it was not a problem if the deficit rises next year, as the government expects it to start falling in 2020.
A government meeting summoned by Prime Minister Giuseppe Conte over the 2019 budget made useful progress, Deputy Prime Minister Matteo Salvini said on Friday.
Italian bond yields were down up to 4 basis points across the curve, having jumped by up to 12 bps on Thursday on a news agency report that Di Maio had threatened to quit the coalition if his party’s spending demands were not met., ,. The denial by his spokeswoman came only later in the day.
The government parties remain keen to spur economic growth by setting next year’s budget deficit target at more than two percent of annual output, a level that clashes with European Union commitments and may boost the country’s mammoth debt.
Economy Minister Giovanni Tria, who is a member of neither party, has to set growth, deficit and debt targets for next year’s budget by Sept. 27. Tria wants to keep the 2019 deficit at 1.6 percent of GDP, according to a government source, while sources from the 5-Star and League have told Reuters they want it as high as 2.5 percent.
Elsewhere Germany’s 10-year yield receded to 0.46 percent as investors returned to safe-haven assets. It had hit a four-month high of 0.506 percent on Thursday, but struggled to maintain this level, rallying back down after renewed Brexit concerns and the infighting in the Italian government.
However, higher Japanese government bond (JGB) yields are putting upward pressure on the 10-year Bund and could push it above 0.50 percent again, said Mizuho rates strategist Peter Chatwell.
“A catalyst could be the rise in long end JGBs after this morning,” he said. “The 40-year JGB is now over 1 percent and that was the ceiling for a long time. Demand for Bunds will be at a slightly higher level now.”
Long-end Japanese government bond yields rose on Friday morning after the Bank of Japan opted to reduce long end purchases by 10 billion yen at its latest policy meeting. Forty-year JGBs breached 1 percent, and 30-year bonds rose 3.5 basis points to their highest point in a year at 0.898 percent.
Euro zone business growth eased again in September, another sign momentum in the currency bloc is well past its peak, although optimism picked up a tad from August’s 23-month low, the PMI survey showed on Friday. (Reporting by Virginia Furness Editing by David Stamp and Peter Graff)