October 9, 2018 / 11:06 AM / in 13 days

UPDATE 2-Italy's bond yields fall after Tria makes Draghi-style pledge

* Italian bond yields pull back from multi-year highs

* Tria pledges to act if market rout turns into crisis

* Italy 30-yr touches 4 pct for first time in 4 years

* Italy/Germany bond yield spread widest since 2013 (Recasts with turnaround in bond market, adds details, Tria comments, quotes)

By Virginia Furness, Dhara Ranasinghe and Abhinav Ramnarayan

LONDON, Oct 9 (Reuters) - Italian government bond yields fell from multi-year highs on Tuesday after Economy Minister Giovanni Tria pledged to do whatever is necessary to restore calm if market turbulence turns into a financial crisis.

As Italian bond yields have risen sharply in the past two sessions, analysts said some investors were also encouraged to move back into the battered bond market.

Tria called on Tuesday for more measured debate over government budget plans, and said that in the face of a crisis the government would “do what it must do, as (ECB President Mario) Draghi did,” making reference to his 2012 speech to halt the euro debt crisis.

Bond yields had initially risen after Tria’s speech, which was not seen as reassuring for financial markets. However his subsequent comments appeared to trigger a turnaround.

Italian equities also firmed into the market close and were last up over one percent, outperforming their European peers .

In late trade, bond yields were down as much as 11 basis points. Italy’s 30-year bond yield was at 3.96 pct, having risen above four percent for the first time since August 2014 .

“We’ve had (Luigi) di Maio and (Matteo) Salvini saying they won’t give into market pressure while Tria’s comments suggest the government would at some point,” said Jack Allen, senior European economist at Capital Economics in London, referring to the co-leaders of Italy’s populist coalition government.

“So those comments have bought some calm to the market. Our view is that yields will rise again as economic growth disappoints and the budget deficit rises.”

Five-year Italian bond yields were at 2.89 percent, having risen to 3.13 percent, their highest level in almost five years, while 10-year bond yields came off a new 4-1/2 year high at 3.71 percent to close at 3.52 percent.

The premium investors demand for holding Italian 10-year bonds over top-rated Germany had reached its widest point in five years at around 312 basis points before receding to 297 basis points.

Analysts said the fact Italy’s budget office said on Tuesday the country’s growth targets were too optimistic may have raised hopes that the budget plans would be revised correspondingly.

The European Commission has told Italy it is concerned about the budget deficit plans for the next three years since they breach what the EU asked Rome to do in July.

“Instability and uncertainty is here to stay,” said one Milan-based rates strategist who asked not to be named.

“There is a power struggle between the government, EU institutions and financial markets and we are nowhere near the end of the confrontation.”

Spanish and Portuguese bond yields briefly rose to their highest levels since May and June respectively , but those markets have not seen heavy selling - suggesting that contagion from Italy remains limited.

In fact, most bond yields in the bloc inched lower as U.S. markets opened after Monday’s public holiday and Treasury yields pulled back from multi-year highs.

U.S. Treasury yields have risen sharply in recent sessions on the back of a strengthening economy and on expectations the Federal Reserve will continue to hike rates as a result.

German and French 10-year yields rose one to two basis points each at 0.55 percent and 0.90 percent respectively.

Reporting by Dhara Ranasinghe, Virginia Furness and Abhinav Ramnarayan Editing by Mark Heinrich

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