September 11, 2018 / 8:07 AM / 3 months ago

German Bund yields at five-week highs, Italian yields tumble again

* German bond yields at five-week high

* Italy budget, Brexit deal optimism knocks safe havens

* Italian bond yields fall for seventh straight day

* Spain to price 15-year inflation-linked bond

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

By Dhara Ranasinghe

LONDON, Sept 11 (Reuters) - Bond yields in benchmark euro zone issuer Germany rose to their highest level in five weeks on Tuesday, as growing hopes of fiscal restraint in Italy and a Brexit deal in coming weeks eroded demand for safe-haven debt.

Italy’s bond yields fell for a seventh straight session, with long-dated yields hitting their lowest level since late July.

The rally in Italian bonds in the past week helped paint a positive backdrop for a new syndicated 15-year inflation-linked bonds from Spain, expected to be priced later on Tuesday.

Comments from top Italian politicians in recent weeks that European Union fiscal rules will be respected in the 2019 budget talks have boosted Italian debt and hurt top-rated German bonds.

Demand for safe-haven bonds took a further knock late on Monday after the EU’s Brexit negotiator, Michel Barnier, said a divorce deal with Britain could be agreed in six to eight weeks if negotiators were realistic in their demands.

“An easing of risks is weighing on German bonds,” said KBC rates strategist Mathias van der Jeugt. “If you look at yesterday’s driver, you see weakness in Bunds followed strength in Italian bonds and a second down leg in the German market followed the Barnier comments.”

That appeared to be the theme in early Tuesday trade.

Italy’s 10-year bond yield fell to its lowest in more than six weeks at 2.7 percent, while Germany’s Bund yield rose more than two basis points to a five-week high at 0.423 percent.

That left the gap between the two at around 225 basis points, its tightest since the start of August.

Britain’s 10-year gilt yield rose to 1.509 percent , its highest level since May.

Analysts said Thursday’s upcoming ECB meeting should temper bond market moves in general.

The ECB is expected to firm up its plans to halve monthly asset purchases to 15 billion euros ($17.4 billion) come October .

The central bank is now widely expected to end its asset purchase-scheme at the end of this year, although confirmation of this is likely to come later on to allow the ECB some flexibility.

Reporting by Dhara Ranasinghe, editing by Larry King

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