September 6, 2018 / 11:31 AM / in 7 months

UPDATE 2-Italian debt set for stellar week as budget concerns ease

* Italian 10-year yield down 34 bps this week so far

* U.S. tariffs announcement could fuel demand for Bunds

* France, Spain sell bonds

* Euro zone periphery govt bond yields (Updates prices for close, adds late move in German bonds)

By Abhinav Ramnarayan

LONDON, Sept 6 (Reuters) - Italian debt is on course for one of its best weeks since the euro zone debt crisis, as investors welcome signs that the government in Rome is rowing back from plans to spend beyond EU-prescribed limits.

On Thursday it extended price gains made on remarks from Italian ministers that suggested the 2019 budget would conform with European Union rules.

“There are a lot of hopes in the markets that it will agree a budget (deficit) below 3 percent (of GDP) and I think we will see a lot of headlines in the next few days confirming that,” said DZ Bank strategist Sebastian Fellechner.

Deputy Prime Minister Luigi Di Maio said on Wednesday the budget would be “courageous”. But he also said it would keep state accounts in order, a comment later repeated by Prime Minister Giuseppe Conte.

Italy’s 10-year bond yield fell 6 basis points to 2.88 percent before climbing back to 2.90 percent in late trade, leaving it down 34 basis points on the week.

Barring the week commencing June 11 when it fell over 50 bps, the 10-year yield has not registered a bigger weekly drop since September 2012, when the European Central Bank intervened decisively to tackle the euro zone debt crisis.

The Italian/German 10-year bond yield spread briefly narrowed to a one-month low of 244 bps before widening to 254 bps in late trade.

Italy’s five-year borrowing costs touched lows of 2.01 percent — their lowest in a month — before climbing back to 2.11 percent towards the end of trading. Its two-year yields were down 5 bps to 1 percent. Both are down almost 50 bps this week so far.

The yields are still well above the levels of April and early May, however, when Italy’s 10-year borrowing costs went as low as 1.71 percent.

Investors have heavily sold off Italian bonds since the new government took office in June, on concerns the governing coalition’s fiscal plans would put the country’s already huge debt pile under strain as well as breaching EU rules.

Despite this week’s reassuring noises, markets remain cautious.

“Even if they agree on a (EU-friendly) budget now, the topic is not off the table. It will accompany us during the next year, because they could hit higher spending at any time citing extraordinary circumstances,” said Fellechner of DZ Bank.

Other euro zone bond yields reversed earlier gains to head lower as world stock markets came under pressure. Germany’s 10-year government bond yield, the benchmark for the region, fell 3 bps to 0.35 percent.

France raised 8.5 billion euros in an auction while Spain sold 4.92 billion euros.,

U.S. Treasury yields were almost down 3 bps, dragging benchmark euro zone bonds down with them.

Reporting by Abhinav Ramnarayan; Additional reporting by Virginia Furness Editing by John Stonestreet

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