* Demand for Spanish bond auction lower than usual
* Report of Tria comments on budget hit Italian debt
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Rewrites to reflect sell-off in southern European bonds)
By Abhinav Ramnarayan
LONDON, July 5 (Reuters) - Italy led a broad selloff in southern European government bonds on Thursday, after indifferent demand for a Spanish debt auction spooked investors already worried about defiant comments from the new Italian government on its budget plans.
Spain sold 4.76 billion euros of debt at an auction on Thursday, below the maximum target of 5.5 billion euros and demand was down across the tranches compared to previous auctions.
While not a poor result in itself, Spanish debt has been so popular among investors over the past year or so that any sign of lower demand triggers concerns over contagion from Italy’s political worries.
“If you see demand is weak for the best of the peripheral countries, then it hurts sentiment towards all, and Italy especially, given the underlying problems,” said BBVA strategist Jaime Costero Denche.
“Given the low volumes of trading and all the news flow regarding the first budgetary programme of the new Italian government, investors may decide this is a good time to sell.”
Italy’s 10-year government bond yields rose 6 basis points to 2.71 percent, while shorter-dated two- and five-year yields rose 12 bps each.
Spanish and Portuguese equivalents were 3-4 bps higher.
“We are moving into summer with low volumes and due to the overall critical situation in Italy, you see that when Spanish yields move 2-3 bps, Italy may rise much more,” said DZ Bank strategist Daniel Lenz.
Bloomberg quoted Italian Finance Minister Giovanni Tria as promising both tax cuts and universal basic income.
“Tria gave some insight into the budget plans of the new government, including ideas such as flat tax and basic income, both of which would have a major fiscal impact,” Lenz said.
The change in sentiment pushed German yields lower, as investors retreated to the safety of better-rated assets.
Unease in world stock markets ahead of a U.S. July 6 deadline to impose tariffs on Chinese imports was keeping demand high for safe-haven government debt.
Having risen earlier in the day, 10-year German yields were down a basis point to 0.29 percent, only a shade off one-month lows hit on Monday.
Reuters reported last week the ECB was considering buying more long-dated bonds from next year to keep euro zone borrowing costs in check. That pushed longer-dated bond yields further down.
France sold almost 8 billion euros of bonds via auctions on Thursday.
Market focus turned to the release due later in the day of minutes from the Federal Reserve’s last meeting.
“Our U.S. economists believe that discussion regarding trade developments and the flattening yield curve will be of note given recent comments by Fed officials,” Deutsche Bank said in a note.
Reporting by Dhara Ranasinghe; Editing by Andrew Roche