September 20, 2018 / 8:14 AM / 2 months ago

Italian bond yields dip, risk sentiment offsets budget fears for now

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

By Virginia Furness

LONDON, Sept 20 (Reuters) - Italian government bond yields dipped on Thursday as improved risk sentiment in global markets allowed the market to recover some ground from the previous day’s sharp sell-off.

Italy’s five-year government bond yield had risen as much as 12 basis points in late trade on Wednesday for its largest one-day rise in more than a month, after wrangles over the 2019 budget.

It opened on Thursday morning three basis points lower at 1.82 percent, with markets continuing to digest headlines on the 2019 budget.

Italy should aim at a 2019 deficit of more than 2 percent of output to spur growth, the cabinet undersecretary said on Thursday.

“There has been a lot of news flow and all parties are in discussion about the budget,” said Daniel Lenz, rates strategist at DZ Bank.

“The League and 5-Star expect a deficit of 2 percent or more, while the minister of finance expects less. This is the reason for concern and why we had spread-widening yesterday.”

On Thursday Deputy Prime Minister Luigi Di Maio reiterated that the government’s priority is to make life better for Italians, not to reassure markets. Italy’s populist government is considering increasing the country’s budget deficit to spur growth, he said.

Elsewhere, Germany’s 10-year government bond passed the key 0.5 percent mark on Wednesday to reach a three-month high but opened lower on Thursday at 0.49 percent.

“Yields yesterday tried to go above 50 bps, but it seems the bears are not yet ready to take this level. That is why we see, for technical reasons, the move to the downside,” Lenz said.

Five-year U.S. Treasury yields hit decade highs as investors continued to price in more interest rate increases by the Federal Reserve this year and next. Ten-year Treasury yields rose to 3.09 pct, the highest level in four months.

Expectations of U.S. growth pushed the spread of 10-year U.S. government bonds over Germany to 260 basis points on Wednesday, its highest since the end of May. The so-called transatlantic spread stood at 258 bps in early trade on Thursday.

Spain’s 10-year bond yield fell 3 bps to 1.53 percent even as new supply loomed.

The sovereign will sell 4-5 billion euros of new debt by tapping four existing bonds, with the longest maturing in 2028.

Fresh supply from Spain and France could keep upward pressure on euro zone yields. France is due to sell 6.5-7 billion euros of government bonds and its curve was also around 1 basis point lower at the long end.

Reporting by Virginia Furness Editing by David Goodman

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