November 28, 2017 / 1:03 PM / a year ago

UPDATE 2-Southern European yields dip as political risk fades

* Italian and Spanish government debt outperforms

* German, Irish political outlook improves

* Fed’s Powell says conditions supportive for Dec hike

* Euro zone periphery govt bond yields (Updates prices)

By Abhinav Ramnarayan

LONDON, Nov 28 (Reuters) - South European government bonds outperformed on Tuesday as fading political risk added to the benign outlook for the bloc and gave investors more reason to buy riskier, lower-rated debt.

Germany’s two largest parties are expected to begin talks on a “grand coalition” while the resignation of Ireland’s deputy prime minister suggested a snap election that could have threatened Brexit negotiations will be avoided.

“The news this weekend of the grand coalition in Germany is positive for peripheral spreads,” said Rabobank strategist Lyn Graham-Taylor, referring to the bond yield spread between low-rated Southern European countries and the benchmark German equivalent.

“On the margins, the news around the Irish election may also be giving them a boost.”

In addition, French consumer confidence topped forecasts in November while the positive mood among German shoppers was unchanged heading into December.

Italian and Spanish 10-year government bond yields fell around 2 basis points each before pulling back slightly in late trade .

Benchmark German 10-year yields were little changed at 0.34 percent.

Apart from the reduction in political risk, Germany’s pro-business Free Democrats (FDP have traditionally taken a tough stance on the indebted Southern European countries. The fact that a “grand coalition” would exclude them is also seen as positive for Italy, Spain and Portugal.

There was also some focus on the United States, where the Treasury yield curve steepened after touching its flattest in a decade, something viewed as a much-needed reprieve from months of flattening as investors awaited progress on U.S. tax reform.

The U.S. Federal Reserve is likely to raise interest rates again next month, Fed chair nominee Jerome Powell meanwhile signalled.

It is also an important week for tax overhaul plans in the world’s biggest economy.

A U.S. Senate Republican tax bill strongly backed by President Donald Trump faced potential opposition on Monday from two Republican lawmakers who could prevent the sweeping legislation from reaching the Senate floor.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=

Reporting by Abhinav Ramnarayan; Editing by Alison Williams

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