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Italy's bond yields hold near 7-month lows as Salvini falls short

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

LONDON, Sept 22 (Reuters) - Italy’s borrowing costs fell on Tuesday towards their lowest levels in seven months on a perceived reduction in political risk as right-wing opposition leader Matteo Salvini failed to make the breakthroughs he had hoped for in regional elections.

The results of the Sept. 20-21 vote, released late on Monday, were a boost to the fragile coalition government which is battling with the economic slump sparked by the coronavirus.

Italy’s 10-year bond yield was last down 2.5 basis points at 0.92%, hovering near a seven-month low touched on Monday at 0.90%.

The closely-watched 10-year yield gap over safe-haven Germany hovered around 143 basis points, having tightened to one-month lows late the previous session.

“The overall result of the regional elections in Italy is a clear positive and puts political risk in the back seat for the next few weeks, in our view,” analysts at UniCredit said in a note.

New supply from Germany and the Netherlands later this session put some upward pressure on bond yields elsewhere in the single-currency bloc.

Germany is scheduled to sell five billion euros of two-year bonds and the Netherlands is due to auction a new 30-year bond.

Still, any selling pressure in European bonds was largely offset by demand for safe-haven assets in the face of growing concern about a rise in coronavirus cases in Europe.

Germany’s benchmark 10-year bond yield was steady at -0.52% , not far off Monday’s six-week low of -0.54%.

“The virus picture has become much more negative in the global north, renewing risk of lockdowns, and cementing the reality that this is a situation that will continue to dog businesses and economies into the longer-term,” said Mizuho rates strategist Henry Occleston.

Dovish comments from the European Central Bank have also supported euro area bond markets, with ECB chief Christine Lagarde saying on Monday the bank is attentive to euro strength.

Investors’ expectations for an ECB rate cut next year have risen in recent sessions, with money markets now fully pricing in a 10 bps rate reduction by July next year.

Reporting by Dhara Ranasinghe; Editing by Andrew Cawthorne

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