(Corrects Italian 10-year bond yield in second paragraph to 3.41 percent from 2.60 percent, and rise in basis points to eight)
* EC cuts Italian 2019 growth to 1.2 pct, ups deficit to 2.9 pct
* Italian bond yields rise as much as nine bps
* Moscovici says Italy must respect rules
* Italy coalition reaches deal over statute of limitations
By Virginia Furness
LONDON, Nov 8 (Reuters) - Italian bond yields rose on Thursday after the European Commission cut Italy’s growth estimate and forecast a jump in Rome’s budget deficit, and as infighting between Italy’s coalition partners continued.
Italy’s 10-year government bond yield was eight basis points higher at 3.41 percent, pushing its spread over higher-rated Germany out to 295 basis points.
Infighting between the Italian coalition government partners may keep upward pressure on bond yields, although the government did reach an agreement on justice reform on Thursday.
Deputy Prime Minister Luigi Di Maio was quoted as saying on Thursday before the agreement was reached that the coalition could collapse if there was no deal.
EU forecasts showed Italian growth assumptions are optimistic. In 2019, Italian GDP would rise 1.2 percent, the Commission said, instead of the 1.5 percent seen by Italy.
Lower growth will push up Italy’s headline budget deficit, with the EU predicting a jump in the 2019 deficit to 2.9 percent, rather than the 2.4 percent seen by Italy, and to 3.1 percent in 2020, rather than fall to 2.1 as Rome assumes.
“Markets seem quite worried about the numbers the Commission put out, but already in the morning BTPs (Italian government bonds) were underperforming so the trend is continuing,” said Jean-Christophe Machado, rates strategist at Natixis. “The positive note is that Spain and Portugal are doing quite well.”
EU Commissioner for Economic Affairs Pierre Moscovici said that the difference was caused by “more prudent” estimates on Italian consumption and investments.
Moscovici also heaped pressure on Italy’s government to respect EU rules on deficits, as the clash between the two continues.
More broadly, euro zone growth is expected to slow in the coming years as the bloc faces risks from U.S. economic policies, Britain’s unclear divorce terms from the EU and free-spending plans in high-debt members, like Italy, the EU Commission said.
Euro zone bond yields were broadly higher following the publication of the report, with the exception of Spain, which saw its 10-year bond yield drop 1.2 basis points.,
Investors digested heavy euro zone bond supply.
Ireland sold 750 million euros ($855 million) of five and 10-year bonds, while Spain raised four billion euros with a sale of multiple bonds, and France raised 8.87 billion, also via a sale of multiple bonds.
Risk appetite, which picked up in the wake of Tuesday’s U.S. midterm elections, eased off ahead of a statement from the Federal Reserve after its policy meeting. Germany’s 10-year government bond yield pulled back from a two-week high of 0.469 percent hit early in the session to 0.46 percent, up just one basis point on the day.
U.S. 10-year Treasury bond yields also pulled back from the one-month high of 3.25 percent hit on Wednesday to 3.22 percent. .
The U.S. Federal Reserve began its policy meeting on Wednesday facing a shifting political landscape but little in recent economic data to alter plans for an interest rate increase in December and more to come next year. ($1 = 0.8769 euros) (Reporting by Virginia Furness Editing by Gareth Jones and Susan Fenton)