August 9, 2018 / 10:54 AM / a year ago

UPDATE 3-Italian yields edge higher as budget concerns remain in focus

* Italian bond yields rise 3-6 bps

* Di Maio says on track for high-spending budget

* 10-year German Bund yields hit two-week lows

* Lira and rouble weakness fuel risk aversion

* Euro zone periphery govt bond yields (Tweaks headline to reflect rowing back of yields, updates prices)

By Virginia Furness and Dhara Ranasinghe

Aug 9 (Reuters) - Italian Deputy Prime Minister Luigi Di Maio renewed investor concern on Thursday that the country was heading for a costly and unsustainable spending spree, pushing Italian bond yields higher on the day.

Di Maio, leader of the anti-establishment 5-Star Movement, told reporters that next year’s budget would included pension reform, tax cuts and a citizen’s income. Such measures would cost billions of euros and put pressure on public accounts .

Italy’s two- and 10-year bonds rose as much as seven basis points at one stage, though this made the bonds attractive to some investors and late buying helped pull yields off their session highs.

Borrowing costs were still up 2-3 bps on the day when the market closed.

“I think Di Maio’s comments are the trigger (for the rise in yields), because it now looks like the government wants to implement the spending programme fully and they want to do it soon,” said BBVA strategist Jaime Costero Denche.

The previous day, comments by Italian Prime Minister Giuseppe Conte had given investors hope the programme would be phased in over a number of years,

The contrasting comments by government officials have led to swings in Italian yields as investors try to assess whether the country’s 2019 budget will clash with European Union rules on fiscal discipline.

“Basically we will continue to see noise until the implementation of the budget in September,” said Costero Denche.

That left the Italian/German 10-year bond yield gap at around 253 basis points, about 8 bps wider than levels touched on Wednesday.

Elsewhere, euro zone bond yields inched down on Thursday as risk aversion gripped world markets and boosted demand for fixed income.

Long-dated yields on safe-haven German bonds touched a two-week low as European stocks struggled with trade war worries, Russia’s rouble tumbled after the United States imposed fresh sanctions on the country and Turkey’s lira dropped to a new low.

Germany’s benchmark Bund yield dipped to a two-week low at 0.377 percent.

Threats to global growth are growing as the risk of protectionism and higher U.S. tariffs sap confidence, the European Central Bank said in a regular economic bulletin on Thursday.

Also in focus for euro zone bond investors is the auction of 30-year U.S. Treasury bonds, following the successful sale of $26 billion 10-year debt on Wednesday.

Reporting by Virginia Furness and Dhara Ranasinghe; Additional reporting by Abhinav Ramnarayan; Editing by Larry King, Richard Balmforth

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