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UPDATE 3-German bond yields edge higher, Italian 10-year yield hits year low

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Recasts, adds detail)

LONDON, Oct 7 (Reuters) - Benchmark German government bond yields rose slightly on Wednesday as investors comforted by incremental pandemic aid in the U.S. loaded up on stocks, offsetting worries about an unexpected dip in German industrial output in August.

Ten-year Bund yields were 1 basis point higher at -0.49% , just shy of a two-week high.

Yields had earlier dipped after German industrial output data suggested the recovery in Europe’s largest economy from the coronavirus shock could be weaker than previously hoped.

Meanwhile, Germany’s offer of 2.48 billion euros of its August 2030 bond met tepid demand.

The gap between German and U.S. 10-year yields was 129 basis points, close to its widest level since March hit on Tuesday, mainly driven by a rise in U.S. yields.

U.S. President Donald Trump urged Congress to provide $1,200 stimulus checks for Americans and other support for airlines and small businesses after earlier calling off talks in Washington over a coronavirus relief package until after the election.

Yields on Italian 10-year government bonds fell to their lowest in more than a year at 0.765% with traders expecting more monetary policy stimulus from the European Central Bank following its chief’s dovish comments on Tuesday.

Trading platform Tradeweb, which cites a different benchmark, said the Italian 10-year bond yield fell to a record low of 0.72%.

“People think it’s a little bit of a one-way bet on more stimulus being required from the ECB,” said Lyn Graham-Taylor, fixed income strategist at Rabobank.

If the euro strengthened, that would increase the likelihood of ECB easing, Graham-Taylor said. “If the dollar is stronger, it is probably due to some risk-off factors and this is probably also going to encourage the ECB to have to do more easing.”

Spain’s 10-year government bond yield was little changed at 0.23%, shrugging off a 5.7% year-on-year fall in the country’s calendar-adjusted industrial output in August.

Spain will increase state investment spending by 27 billion euros ($31.74 billion) in 2021 following emergency European Union funds for recovery from the coronavirus crisis, the prime minister said on Wednesday.

Minutes of the Fed’s September policy meeting are due later in the day, with investors looking for details on the central bank’s new approach to inflation.

ING analysts said they did not expect the minutes “to be an existential threat to the reflation trade taking hold in dollar rates markets”.

Still, forward Fed Fund rates price in the first full hike only by the middle of 2024, which is slightly more hawkish than before the announcement of the average inflation target, they said.

“This move higher in expected policy rates could accelerate should the minutes highlight that the Fed has merely given itself the option, rather than given a hard commitment, not to raise rates preventively.” (Reporting by Olga Cotaga; Editing by Barbara Lewis and Tomasz Janowski and Kirsten Donovan)

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