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UPDATE 2-Five-year Italian yields touch record low, U.S./German yield gap at March high ahead of election

* Market focus on U.S. voters head to the polls

* Italian bonds rally; five-year yield drops to record low

* U.S.-German 10-year yield spread rises to highest since March

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Recasts, adds details, updates prices)

LONDON, Nov 3 (Reuters) - Italian five-year bond yields fell to record lows and the gap between German and U.S. bond yields rose to its highest since March on Tuesday as markets appeared confident challenger Joe Biden would win the U.S. presidential election.

On Tuesday stock markets rose as investors bet on a clear win for Democratic Party candidate Biden, which is expected to lead to the launch of a large new U.S. stimulus package, hurting safe-haven government bonds alongside the U.S. dollar.

In the euro zone government bond market, demand for riskier assets pushing five-year Italian bond yields to a record low at 0.039%.

Portuguese 10-year yields fell to their lowest since August 2019 at 0.081% and their Spanish equivalents to their lowest since September 2019 at 0.106%.

Safe-haven German 10-year yields were last up 1 basis point to at -0.62%.

“If it was clear that there was a blue wave, a Democratic sweep, I think you would see more of the same that you would see this afternoon,” said Richard McGuire, head of rates strategy at Rabobank in London

“I would expect euro zone government bond spreads to narrow on the back (of a Biden victory),” he added, referring to the risk premium countries like Italy pay on top of German borrowing costs, which narrowed on Tuesday.

The gap between U.S. and German 10-year bond yields rose to its highest since March at 151 basis points.

It has risen in recent months as economic recovery has diverged between the United States and European countries.

UniCredit analysts said that if Biden won, that difference could move towards 155 basis points.

“The main aspect of a blue wave is a higher growth and inflation outlook compared to the current status quo, in our view, with global economic policy uncertainty declining,” they said.

Jan von Gerich, analyst at Nordea, doubted the U.S. election outcome would have much impact on euro zone bond yields, given the European Central Bank “remains in control and will keep yields near these levels”.

Expectations of further stimulus, which the European Central Bank committed to providing in December last week, have pushed Southern European bond yields to or near record lows in recent weeks.

Some ECB policymakers are advocating providing the further stimulus via the ECB’s conventional bond buying programme, which restricts funding for each country based on pre-determined quotas, rather than the pandemic emergency programme which gives it unprecedented flexibility in allocating purchases, sources told Reuters.

Reporting by Yoruk Bahceli and Tommy Wilkes; editing by Emelia Sithole-Matarise, William Maclean

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