* Tria set to defend budget to parliament
* Investors expect economy minister to strike moderate tone
* Italian 10-year yield drops from 4-1/2 year high
* Spread over Germany stable at around 300 bps
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr
By Abhinav Ramnarayan
LONDON, Oct 9 (Reuters) - Italy’s benchmark 10-year government bond yield edged off a 4-1/2-year high on Tuesday on hopes that Economy Minister Giovanni Tria will strike a moderate tone when defending the government’s contentious budget plans in parliament on Tuesday.
Italian government bonds were sold off heavily on Monday as a war of words between Rome and the European Union over Italy’s spending plans escalated.
But Tria is generally perceived as more wedded to budget discipline than some of the other members of the government.
“People are starting to buy (Italian BTP) futures on hopes Tria will strike a more conciliatory tone when he defends the budget in parliament today,” said Commerzbank rates strategist Christoph Rieger.
Jean-Christophe Marchado, a fixed income strategist at Natixis, agreed, saying: “Everybody knows that Tria is market- friendly and has fought for conciliation between the EU and Rome.”
In addition, a Milan-based trader attributed the drop in yields to a report saying Italy’s parliamentary budget office is set to reject the government’s budget plan, though such a move would not be binding.
Italy’s 10-year government bond yield dropped two basis points in early trade to 3.55 percent, while the spread over Germany hovered around the 300 basis point mark, three bps tighter on the day. Monday had seen some of the widest levels in five years.
Short-dated two-year bond yields were 4 bps lower at 1.78 percent and five-year yields were 4.5 bps lower at 2.94 percent.
Also on Tuesday, a La Stampa report said that Prime Minister Giuseppe Conte and Tria could do a roadshow to support Italian government bonds.
Market participants will also be keeping a close eye on an Italian bond auction on Thursday. Italy’s debt agency said on Monday it would offer up to 6.5 billion euros over four bonds.
Higher-rated euro zone bond yields rose on Tuesday, following another rise in 10-year U.S. Treasury yields, which hit a fresh seven-year high of 3.256 percent in Asian trade.
U.S. Treasury yields have been rising on the back of a strengthening economy and on expectations the Federal Reserve will continue to hike rates as a result.
German and French 10-year government bond yields were up a basis point each at 0.55 percent and 0.89 percent respectively.
Reporting by Abhinav Ramnarayan; Additional reporting by Dhara Ranasinghe in LONDON, Elvira Pollina in MILAN