* Italy-Germany yield spread narrowest in three weeks
* U.S.-Germany spread near 1-month high as Fed rate hike
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr
(Updates prices, adds Greece)
By Abhinav Ramnarayan
LONDON, June 13 Italian government bonds were in
demand again on Tuesday after the threat of snap elections
receded and anti-establishment party 5-Star Movement suffered a
setback in local elections.
Italy's borrowing costs dropped to multi-month lows, the
bond yield spread over Germany was at its narrowest in nearly
three weeks and the country's debt agency sold 5.5 billion euros
of bonds in an auction.
Political risk appeared to be waning in Italy after former
Prime Minister Matteo Renzi ruled out snap elections later this
year. In addition, 5-Star Movement suffered a resounding defeat
in local elections, results released on Monday
"The news is generally positive for risk sentiment in Europe
- the tail risk (presented by Italian elections) is being
displaced by six months or more, so you are looking at
potentially six to nine months of carry," said Mizuho strategist
"So investors are willing to take on spread risk - that is,
sell Germany and get into Italy."
The gap between Italian and German 10-year bond yields
dropped to 171 basis points on Tuesday, the lowest in almost
three weeks and well off the 201 bps it reached last week.
The yield on Italy's 10-year government bond fell more than
3 bps to its lowest since late January at around 1.97 percent.
That help push other low-rated Southern European government
bond yields down: Portugal's 10-year bond yield fell to a new
nine-month low of 2.93 percent, while Spanish
yields nudged lower.
While political risks have largely slipped down investors'
worry lists since centrist Emmanuel Macron won the French
presidential election, they have not completely disappeared.
In the Netherlands, a lack of progress in forming a new
government since elections in March have weighed on Dutch bonds
. Political turbulence in Finland has also drawn
attention this week.
Finland's government averted collapse on Tuesday when the
nationalist Finns Party split into two groups, leaving newly
elected hardline anti-immigrant leaders in the cold.
The yield on Germany's 10-year government bond, the
benchmark for the region, was up just 1 bps on the day at 0.27
Last week's decision by the European Central Bank to cut
inflation forecasts and signal monetary policy will remain loose
has also helped euro zone bonds, analysts said.
"You also saw the ECB cut the inflation forecasts for 2019 -
the likely read through from that is that they will have to
prolong the asset purchase programme," Bouvet said.
This is in sharp contrast with the United States, where
policymakers are largely expected to raise rates on Wednesday
and may provide more detail on plans to shrink its mammoth bond
The "transatlantic spread" between German and U.S. 10-year
borrowing costs were close to one-month highs at 195 bps as U.S.
ratesetters were set to begin a two-day meeting later on
Elsewhere, euro zone finance ministers and the International
Monetary Fund are likely to strike a compromise on Greece on
Thursday, clearing the way for new loans for Athens while
leaving the contentious debt relief issue for later, officials
Short-dated government bond yields in Greece fell to 4.896
percent, their lowest level since October 2014.
For Reuters Live Markets blog on European and UK stock
markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets
(Additional reporting by Dhara Ranasinghe, editing by Larry