August 8, 2018 / 11:16 AM / 3 months ago

UPDATE 1-Italian bonds rally as PM Conte says won't be "unreasonable" on budget talks

* Conte says won’t make “foolish” demands when negotiating with EU

* Italian government bond yields lower 5-7 bps on comments

* Econ Min Tria says budget plans “compatible” with EU rules (Adds quotes, background)

By Abhinav Ramnarayan and Virginia Furness

LONDON, Aug 8 (Reuters) - Italian government bonds rallied across the curve on Wednesday after Prime Minister Giuseppe Conte said the government would not make “foolish” demands while negotiating with the European Commission over its 2019 budget.

Conte told a news conference that Italy would negotiate with the commission on a “courageous” budget programme but would not be “unreasonable and foolish in our demands”.

Yields were down 5-7 basis points across the curve after the comments, having been flat to 2 bps lower on the day just before.

The yield on the country’s benchmark 10-year government bond was lower 5 bps at 2.82 percent, its lowest in nearly a week, while the closely-watched spread over Germany was at 242 bps, also its tightest in nearly a week.

“Conte’s remarks can be understood as a sign that some spending measures could be phased in over more than one year,” said Mizuho strategist Antoine Bouvet.

“In general, the tone also seems non-confrontational which helps in terms of Italy’s relationship with the EU. But it is very early in the process,” he added.

Italian government bond yields had already been close to their weekly lows in early trade, after Economy Minister Giovanni Tria told local news paper Il Sole 24 Ore that all reforms included in the government’s plans were “compatible” with Italy’s EU commitments on public finances.

Italian public spending is a key focus for investors, with the eurosceptic government’s high spending plans unnerving financial markets.

Italy is one of the most indebted countries in the euro zone, with a debt-to-GDP ratio 131.8 percent at the end of last year, according to Eurostat. This compares with 86.7 percent for the euro zone overall.

Borrowing costs among other euro zone sovereigns were little changed with the yield on Germany’s 10-year government bond, the benchmark for the region, flat at 0.41 percent. (Reporting by Abhinav Ramnarayan and Virginia Furness Editing by Sujata Rao and Raissa Kasolowsky)

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