November 5, 2018 / 12:17 PM / 9 days ago

UPDATE 2-Euro zone yields broadly lower as Treasury yields fall on pre-election nerves

* 10-year Treasury yields down 2.5 bps, Bunds down 1.4 bps

* US holds mid-term vote Tuesday; Democrats may win House

* Italian bond yields rise but end below session highs

* Euro zone finmins discuss Italy budget but no action seen (Updates throughout, adds quotes, US Treasuries)

By Virginia Furness

LONDON, Nov 5 (Reuters) - German government bond yields slipped on Monday, pulled down by a decline in U.S. Treasury yields before key midterm elections, while Italian yields too eased from session peaks, with the euro zone seen unlikely for now to punish Rome for its draft budget.

U.S 10-year yields fell 2.5 basis points, keeping below 3.20 percent, after soft ISM manufacturing numbers and pressured by jitters that a strong showing by the Democrats in Tuesday’s vote would hinder U.S. President Donald Trump’s tax-cut agenda.

Opinion polls suggest Democrats will likely take control of the House of Representatives, while Republicans should hold their Senate majority.

The global backdrop was also not conducive to risky securities, amid doubts over mooted China-U.S. trade talks and signs that the years-old rally in tech shares may be unravelling .

That kept yields on German and U.S. government bonds - seen as safe assets - below highs touched after Friday’s upbeat U.S. jobs figures. German 10-year yields closed 1.4 basis point lower on the day around 0.4230 percent, though this was off earlier lows around 0.412 percent .

“We are gearing up for the political events ahead, so Treasuries are a bit higher. One would imagine that if it goes the Democrats’ way, there could be a stalemate in terms of Trump’s tendency to loosen fiscal policy so there may be a bit of nervousness about that,” Credit Agricole strategist Orlando Green said.

Other core euro zone bond yields were also a touch lower , with sentiment also undermined by a recent slew of weak economic data for the region.

Italian debt markets stayed under pressure but yields eased off session highs touched amid trepidation over a Eurogroup meeting, where euro area finance ministers were to discuss Italy’s draft budget plans.

The chairman of euro zone finance ministers, Mario Centeno, said he hoped Italy would send in a revised 2019 draft budget. Its earlier draft was rejected because it envisages a 0.6 percent of GDP increase in Italy’s structural deficit next year rather than a reduction required by EU rules.

No immediate decision is expected however from the Eurogroup and two-year Italian bond yields closed five basis points higher at 1.13 percent, falling from session highs of 1.228 percent. Ten-year yields were up 1.5 bps to 3.32 percent, having earlier risen as high as 3.39 percent.

Italy’s yield spreads over German counterparts - effectively a measure of Italian risk - widened five bps on the day to 288 bps.

“Italy is going to fall into the background,” said Jan von Gerich, fixed income analyst at Nordea. “The Commission won’t do anything else but talk tough, and even if they have the balls to bring in sanctions it would be late spring anyway.”

Analysts also attributed Italian debt weakness to Friday’s health check of big banks by the European Banking Authority (EBA). While the EBA said none of the 48 lenders failed a major capital threshold, it identified Italy’s Banco BPM as one of the banks that fared the worst in stress tests.

Italian bank shares fell 1.6 percent. (Reporting by Virginia Furness and Sujata Rao Editing by Raissa Kasolowsky and Andrew Heavens)

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