* German 10-year bond yield hits six-month low
* Italy two-year yield touches four-month low
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices, adds Italy, ECB news)
By Virginia Furness
LONDON, Dec 5 (Reuters) - Germany’s 10-year government bond yield briefly fell to its lowest in over six months on Wednesday, feeling the effect of a flattening U.S. curve that is stoking fears of an economic downturn.
Risk sentiment has also been hurt by waning optimism over U.S.-China trade talks and Brexit uncertainty, halting Monday’s global rally in risk assets that was driven by optimism over trade.
The gap between Germany’s two-year and 10-year bond yields narrowed further to 85.70 basis points, the tightest in 17 months, after parts of the U.S. Treasury yield curve inverted for the first time in over a decade, hinting at recessionary expectations.
That gap widened back out and Bund yields crept back up in late trade, as stocks fell and Italian bonds yields tumbled.
Still, Germany’s 10-year bond yield was last up just one basis point on the day at 0.27 percent. It touched 0.24 percent, its lowest level since a rout in Italian bond markets boosted demand for safe-haven bonds on May 29.
“There has been a huge flight to safety in the European bond market, but equities closed on Tuesday only modestly lower while there were sharp falls in the U.S.,” said Martin van Vliet, senior rates strategist at ING. “The European bond market was already preparing for trouble ahead.”
Other high-grade euro zone government bond yields were also around one basis point lower,.
Surveys showed business growth in the bloc was at its weakest in over two years last month as a manufacturing-led slowdown showed further signs of spreading to the service industry.
More turmoil on the Brexit front is likely, after British Prime Minister Theresa May’s government was found in contempt of parliament and then a group of her own Conservative Party lawmakers won a challenge to hand more power to the House of Commons if her deal to leave the EU is voted down.
Italian bond yields extended their sharp falls after a cabinet official raised hopes that the government could cut nearly four billion euros from its 2019 budget plans.
The government will revise its budget plans by next week, and may be able to save four billion euros from its pension and income support programme, cabinet undersecretary Giancarlo Giorgetti said.
Italy’s two-year government bond yield fell to its lowest since July at 0.54 percent. Its 10-year bond yield hit more than two-month lows at 3.05 percent.
Elsewhere, European Central Bank policymakers are debating ways to wean the euro zone off years of easy money, floating ideas such as a new kind of multi-year loans and staggered increases in interest rates, sources told Reuters.
Reporting by Virginia Furness; Editing by Janet Lawrence