June 5, 2018 / 7:25 AM / 10 months ago

Italian govt bond yields rise before business survey

* PMIs could show if politics affecting business sentiment

* Italian 10-year yields rise 5 bps in early trade

* Slovakia eyes potential 50-year bond

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

By Abhinav Ramnarayan

LONDON, June 5 (Reuters) - Italian borrowing costs rose on Tuesday ahead of a survey that should provide an indication of how recent political turmoil affected business sentiment in the euro zone’s third largest economy.

Political concerns last week drove one of the biggest selloffs in Italian government debt since the euro zone debt crisis of 2010-2012.

Though markets have calmed after anti-establishment parties 5-Star and League reached an agreement to form a government, analysts believe further bouts of volatility are likely.

In that context, the Purchasing Managers’ Index (PMI) data for the Italian services sector due out at 0745 GMT takes on added significance.

“If the figure is in line or slightly higher, I would expect markets to ignore it but if it is worse than expected it could be an indication that the political uncertainty is already having an impact on the mood in the economy,” said DZ Bank strategist Daniel Lenz.

PMI data from Spain, which is going through political ructions of its own, is also due. Spanish government bond yields were a touch higher on Tuesday.

Italian 10-year borrowing costs came off a fortnightly low hit on Monday to rise 5 basis points in early trade to 2.60 percent, while their closely-watched spread over Germany widened to 220 bps. The spread stretched beyond 300 bps last week.

Italy’s two-year borrowing costs, which have been volatile on concerns over redenomination risk, rose 10 bps to 0.89 percent.

The Italian senate is due to hold a confidence vote on Tuesday on Giuseppe Conte’s appointment as prime minister.

Market participants will also be keeping an eye on a speech by ECB President Mario Draghi on Tuesday afternoon for any indication of how the political developments in southern Europe may affect monetary policy.

Other euro zone government bond yields were 1-2 basis points lower, as a measure of calm returned to the market.

Germany’s 10-year government bond, the benchmark for the bloc, saw its yield drop 1.5 bps to 0.40 percent.

Spain also saw a change of government last week, with socialist Pedro Sanchez replacing conservative Mariano Rajoy. Investors assessed the likelihood of another election there as low, which kept a lid on volatility.

S&P Global said on Monday that the appointment of the new government in Spain has no immediate effect on the country’s sovereign rating.

Elsewhere Slovakia is preparing for a possible ultra-long bond sale, having announced a mandate for a 10-year and potential 50-year euro bond. (Reporting by Abhinav Ramnarayan; editing by John Stonestreet)

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